First-half core operating profit rose 7% to £918mn (£883mn expected). Performance was boosted by a much stronger showing from asset management, where fee-related earnings rose 37%.
The Solvency II coverage ratio, a measure of balance sheet strength, fell from 210% at the start of the year to 201%, remaining above the group’s target range.
A half-year dividend of 6.24p was announced, up 2%, while around £450mn of the £1.2bn buyback had been completed by the end of July.
Full-year profit growth is now expected to exceed the top end of the previous 6-9% target range.
The shares were broadly flat in early trading.
Our view
L&G delivered a strong first half, with profit growth ahead of expectations and guidance upgraded. Asset Management was the standout, with fee-related earnings improving sharply as recent investment and restructuring started to bear fruit. That’s encouraging, but there’s still work to do before the division reaches management’s longer-term profit ambitions.
L&G’s operations span retirement, retail and asset management. The business has become simpler following the sale of its US protection operations and the combination of its public and private asset management units. We support the direction of travel, which should make the sources of growth and capital generation clearer over time.
Pension risk transfers remain central to the model. These see L&G take responsibility for paying some or all of the pensions from a company’s final salary scheme. In return, it receives a lump sum that can be managed by the Asset Management division, creating useful links across the group and supporting attractive margins.
The long-term opportunity remains significant, with many defined benefit pension liabilities yet to transfer to insurers. However, we’re more cautious on the near-term outlook. Competition has increased as existing providers target growth and newer entrants build scale. That’s putting pressure on pricing and returns, while a growing number of well-funded schemes may choose to run on rather than transfer immediately. L&G’s scale and existing relationships remain advantages, but growth may be harder to come by than it has been of late.
The US partnership remains strategically attractive. L&G has exited a protection business that didn’t fit neatly with the wider group while retaining exposure to the growing US pension risk transfer market. It should also reduce capital demands and support the sizeable buyback programme, although execution across the partnership still needs to be proven.
Asset Management’s improved performance is welcome, but sustaining fee growth and controlling costs will be important as the benefits from restructuring become harder to capture.
The balance sheet remains strong, supporting the dividend and ongoing buyback, while stronger-than-expected profit growth provides further comfort - though returns aren’t guaranteed.
There are plenty of strengths, including a leading retirement franchise and improving Asset Management operations. We see the prospective yield as attractive, but the valuation now looks about right, relative to the near-term growth on offer. Given the growing bulk annuity competition and the absence of any obvious catalysts, we turn a little more cautious from these levels.
Environmental, social and governance (ESG) risk
The financials sector is medium-risk in terms of ESG. Product governance is the largest risk for most companies, especially those in the US and Europe with enhanced regulatory scrutiny. Data privacy and security are also increasingly important risks for banks and diversified financial firms. Business ethics, ESG integration and labour relations also contribute to the industry’s ESG risk profile.
According to Sustainalytics, Legal & General’s overall management of material ESG issues is strong.
L&G's board of directors oversees sustainability, with 30% of executive bonuses linked to ESG factors, and the company ensures cybersecurity through certification. Despite promoting business ethics and having an anonymous whistleblower channel, it could improve transparency in customer due diligence and employee training on responsible marketing.
Legal & General key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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.
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 LSEG. 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.