Legal & General Group plc (LGEN) Ordinary 2.5p Shares
HL comment (10 March 2021)
Legal & General's full year operating profits fell 3% to £2.2bn, or 4.2% to £2.0bn once the effect of one-off mortality releases is removed. That reflects pandemic related disruption in Legal General Capital and increased claims in Legal & General Insurance.
Cash released from continuing operations fell 5% to £1.5bn.
The group announced a full year dividend of 17.57p per share, in line with 2019. The group restated its ambition to grow the dividend by low to mid-single digits from 2021.
The shares were broadly unmoved following the announcement.
While there has been inevitable disruption caused by the pandemic, by and large we think Legal & General has weathered the coronavirus crisis rather well.
In particular, demand for the group's pension risk transfer products remains strong. 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 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 increasing 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. We think growth can continue going forwards - with a formidable defined contribution pension business a potential source of inflows for years to come.
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 climbing debt pile that needs to be addressed, that's diverting cash away from shareholder returns, and dividend growth will be at a slower pace than some analysts had hoped.
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. If that comes with improvements to the balance sheet then so much the better. A 6%+ prospective dividend yield means there should still be enough income to keep shareholders happy - although as ever the dividend cannot be guaranteed.
Legal & General key facts
- Price/Book ratio: 1.54
- 10 year average Price/Book ratio: 1.74
- Prospective dividend yield (next 12 months): 6.6%
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.
Full Year Results
Legal & General Retirement - Institutional reported operating profit of £1.3bn, up 9.5% year-on-year, with a net release from operations of £712m. The division wrote £8.8bn of pension risk transfer business during the year, down 22.4% year-on-year. However, the group maintained its UK market position and saw a 42% increase in US volumes.
Legal & General Retirement - Retail saw operating profit rise 13.3% to £400m, with net releases of £220m. Individual annuity sales fell 6% to £910m, reflecting decisions to delay retirement until after the pandemic. Legal & General grew its share of the annuity market to 20.9%. Lifetime mortgage volumes fell 18% to £791m.
Legal & General Investment Management reported operating profits of £404m, up 2.5% year-on-year, with releases from operations of £342m. That reflects a 6.9% increase in assets under management to £1.3trn, following £22.5bn of net inflows across both DB and DC pensions. In particular the group reported a 14% increase in workplace pension customers.
Legal & General Capital reported operating profits of £275m, down 24.2%, with net releases of £224m. The decline reflects the pause in housebuilding activities during the pandemic, while the value of some of the group's physical assets were also marked down. The group increased the size of the direct investment portfolio by over 9% to £3.1bn during the year, with investments in clean energy, UK housing and SME finance.
Legal & General Insurance reported £189m of operating profit, down from £314m a year ago. Net releases remained broadly flat at £258m. The profit decline reflects the affect of COVID-19 on mortality claims in the US and UK. Gross written premiums rose 4% year-on-year, led by strong new business growth.
The group reported a Solvency II ratio of 177%, down from 184% a year earlier, with a surplus of £7.4bn (2019: £7.3bn).
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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