Legal & General Group plc (LGEN) Ordinary 2.5p Shares
HL comment (4 August 2021)
Legal & General reported underlying operating profits of $1.3bn in the first half, up 13% year-on-year. That reflects strong results in the retail annuities, real asset and Insurance businesses - with many of the group's divisions benefitting from a weaker comparison when the pandemic hit results last year.
The group announced an interim dividend of 5.18p per share, up 5% year-on-year.
Legal & General shares rose 2.2% in early trading.
With the disruption from the pandemic now fading into the rear-view mirror, it feels safe to say Legal & General has weathered the last 18 months well.
Demand for the group's pension risk transfer products and individual annuities has remained healthy throughout. Reassuring since we see these products as the engine room of future growth and the key pivot on which Legal & General's highly integrated business model turns.
Pension risk transfers 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.
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 at £1.3bn and counting - 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 diverting cash away from shareholder returns. Dividend growth is likely to be slower as a result.
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. A 7%+ prospective dividend yield should still be enough to keep shareholders happy - although as ever the dividend cannot be guaranteed. If that comes with improvements to the balance sheet then so much the better.
Legal & General key facts
- Price/Book ratio: 1.65
- 10 year average Price/Book ratio: 1.83
- Prospective dividend yield (next 12 months): 7.1%
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.
Half Year Results
Legal & General's Institutional Annuities business reported a 10% decline in operating profits, coming in at £525m. That reflects a quieter half for the bulk annuity sales, whiLegal & Generalch wrote £3.1bn of new business at a Solvency II margin of 8.4%.
The group's Retail Annuities business reported operating profits of £158m, up 17% year-on-year. That reflects positive mortality releases, as coronavirus continues to affect annuity holders. The division saw annuity sales rise 15% year-on-year to £483m, growing market share, while lifetime mortgage sales rose 14% to $414m. Workplace flows were up 150% to £6.0bn.
Legal & General Investment Management reported operating profits of £204m, up 4%, driven by higher management fees as assets under management increased 6.9% to £1.3trn. The division reported net inflows in the half of £25.7bn, driven by strong inflows from overseas clients and ongoing strength in UK institutional sales - with Solutions accounting for £18.6bn of total net inflows.
Legal & General Capital, which develops real asset investments like property for the rest of the group as well as managing its proprietary trading books, reported operating profits of £250m, up 103% year-on-year. That was driven by the bounce back in the housebuilding market after the pandemic as well as progress in venture capital and clean energy.
Legal & General Insurance reported operating profits of £134m, up from £88m a year ago. That reflects growth in new business premiums - with total premiums rising 2% to £1.5bn - and a significantly improved investment return.
The group's Solvency II ratio, a key measure of insurers capitalisation, came in at 183%, compared to 177% at the start of the year. That reflects reduced Solvency requirements.
The Author holds shares in Legal & General.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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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