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Legal & General - cash & capital generation running ahead of plan

Legal & General is operating in line with management's expectations.

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Legal & General is operating in line with management's expectations. Cash and capital generation is running slightly ahead of expectations, and the group believes it will deliver double-digit growth in the first half.

CEO, Sir Nigel Wilson, also commented: ''The Group's overall exposure to inflation is minimal and our balance sheet is strong''.

Legal & General shares rose 3.1% following the announcement.

View the latest Legal & General share price and how to deal

Our view

Legal & General is one of few companies that stands to benefit from rising interest rates, market volatility and increased credit spreads. That's because a major part of the business is its pension risk transfers (PRTs).

These see Legal & General take on responsibility for paying some, or all, of the pensions from a company's final salary pension scheme (often called bulk annuities). In return the group receives a lump sum. That's then managed by Legal & General Investment Management (LGIM) and underpinned with real assets developed by the Capital division (which includes UK housing and infrastructure projects). LGIM's low cost tracker and liability driven investment strategies are also popular with other final salary pension schemes, who often become future bulk annuity customers.

We view this business model as a major competitive advantage, since replicating all the various areas of expertise is difficult and time consuming. We also think the end markets to which the group is exposed offer long term opportunities.

Demand for bulk annuities is growing, and as well as a dominant UK position, L&G is increasing activity in overseas markets like the US and Canada. We will admit that new business trends were a little more subdued than we'd like last year - but overall we're supportive of the direction of travel.

International customers are accounting for an increasingly large slice of the assets under management in LGIM too, reducing reliance on UK savers. Together with a leading position in passive investment products, that helped the group become the first £1trn investment manager in the UK. Growth has stormed ahead since then, with Assets Under Management (AUM) now well up on that landmark - driven by a formidable workplace pensions business and growing positions in international markets.

However, growing the annuity book is capital intensive.

In order to ensure pensions can be paid, regulators insist life insurers invest a portion of their own capital behind the product. Together with a debt pile that's higher than some might like, that's diverted cash away from shareholder returns.

We'd be remiss not to mention the group's formidable solvency II ratio though, which is a core measure of capitalisation. At well north of 200%, this offers the group some resilience from adverse economic developments. We also note LGEN's surplus capital is up £1.5bn, which paves the way for increased shareholder returns while conditions allow. No dividend is ever guaranteed.

We think a focus on growth is the right decision in the long term - especially as competitors are increasingly keen to muscle in on the bulk annuity business. An 8%+ prospective dividend yield should still be enough to keep shareholders happy - although as ever the dividend cannot be guaranteed.

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Trading Statement

LGRI, the group's institutional annuities business, achieved £4.5bn of global pension risk transfer (PRT) business in the period ending 30 June. There was an £800m increase in the UK to £3.8bn, with a large increase across the international business to £0.7bn. Volumes have been written at margins in-line with, or exceeding the long-term average. The group highlighted PRT demand is strong, as ''rising interest rates and widening credit spreads reduce pension deficits and allow more funds to consider de-risking''.

The Group's alternative asset platform, Legal & General Capital, is still targeting operating profit of £600-£700m by 2025. Housing, Alternative Finance and Venture Capital are performing well. There has been ''notable'' progress in the flow of asset creation from the division - and is on track to deliver £1bn of new assets to LGRI over 2022.

In the Retail business, individual annuity sales and mortgage advances fell. The former fell 6.2% to £453m, and lifetime mortgage & retirement interest only advances were £338m (£414m at H1 2021).

There were external net inflows of over £50bn in Legal & General Investment Management. That was almost double the same time last year, and reflects a strong showing from international business, and higher contribution from more lucrative areas, including ETFs. The group said: ''At half year, we expect the contribution to revenue from flows largely to offset the impact of market movements over the past year.''

LGEN's solvency II ratio - an important measure of capitalisation - was around 215% as at 30 June, up from 187% the end of the last financial year. This reflects the effects of higher interest rates, as well as the group's ability to generate surplus. Return on Equity is consistent with previous performance of around 20%.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 7th July 2022