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Legal & General - On track for a record year

Nicholas Hyett | 7 December 2017 | A A A
Legal & General - On track for a record year

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Legal & General Group plc Ord 2.5p Shares

Sell: 282.20 | Buy: 282.40 | Change -15.20 (-5.10%)
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A brief trading update noted a strong performance across all Legal & General's (L&G's) businesses this year, with particularly strong growth in recent weeks. According to CEO Nigel Wilson the group is on course for a record year in terms of earnings and profits.

Shares ticked up slightly in early morning trading.

Our View

Legal & General serves markets with a lot of growth potential.

It's a market leader in low cost investment products, having been an early entrant into the tracker funds market and subsequently building up a substantial business in that area.

Auto-enrolment has seen the group become the UK's largest defined contribution pension manager, with Workplace customer numbers up 20% in the first half. By 2018, the vast majority of employees will, by law, have been signed up to some sort of scheme, and an extra £17bn of new money is expected to flow into workplace pensions by 2019/20.

Changes to pension rules have diminished the significance of L&G's individual annuity sales, although the division continues to perform well. Demand for L&G's bulk annuity schemes and liability-driven investment products should remain strong, as more companies seek to de-risk existing defined benefit (DB) pension schemes. The UK DB market alone is worth an estimated £2trn.

Although the UK is still the group's centre of gravity, and with current economic headwinds that could yet prove a problem, international expansion should open up further opportunities. International flows accounted for 90% of investment management net inflows in the first half, while the US DB market is four times larger than the UK, and demand for de-risking solutions is growing rapidly. L&G completed 3 small bulk annuity deals in the US in the first half, building on the 6 signed in 2016, as it looks to build a foothold across the pond.

However, the first half earnings mix was been a little disappointing for investors, with L&G Retirement delivering the bulk of growth, boosted by one off releases. The investment management business, where profit growth has been slower, is capital-light and generates recurring income, whereas annuity revenues have become lumpier as the group increasingly relies on blockbuster bulk annuity deals. A more balanced spread of growth would be welcome.

Longer term, L&G appears well set, operating in markets which benefit from wider economic and demographic trends. The capital position is solid, with a Solvency II ratio of 190%, while offering an attractive prospective yield of 6.2% , with analysts expecting steady dividend increases from here.

Trading Update

Legal & General Retirement has delivered £6.2bn of sales in 2017 to date, with strong momentum in the UK and US institutional pension risk transfer, as well as in individual annuities and lifetime mortgages.

Annuity sales hit £4.5bn. Within this, UK institutional pension risk transfers came in at £3.3bn, with UK annuity sales at £0.6bn and US institutional pension risk transfers doubling to $0.7bn.

Gross proceeds from Legal & General Capital hit £256m on £821m of transactions. Legal & General Insurance saw a 6% increase in gross written premiums to £2.1bn, with an improvement in claims trends. General Insurance has seen a 13% increase in gross written premiums to £305m by the end of October.

The group recently announced the £650m sale of its Mature Savings business to Swiss Re.

L&G reported a Solvency II surplus of £6.9bn with a shareholder coverage ratio of 190%.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.