Legal & General Group plc (LGEN) Ordinary 2.5p Shares

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Legal & General reported a 6% rise in full-year core operating profit to £1.62bn (£1.65bn expected). Performance was driven by continued growth in the institutional retirement and retail divisions, while asset management profits were broadly flat.

Pension risk transfer (bulk annuity) volumes increased to £11.8bn over the year. Assets under management rose 5% to £1.2trn.

The Solvency II coverage ratio, a measure of balance sheet strength, fell from 232% at the end of 2024 to 210%. That reflects future dividend payments, and a new £1.2bn buyback that was supported by the sale of its US insurance unit.

A full-year dividend of 21.79p was announced, up 2%.

Growth in 2026 core operating EPS is expected to be at the top end of the 6-9% three-year target range (up 9% in 2025).

The shares fell 5.3% in early trading.

Our view

L&G’s full-year results had a few moving parts, some slightly better, some a touch weaker, but ultimately landed broadly in line with expectations. We thought the reaction on the day was a little harsh, and we remain constructive about the path forward, especially given management's efforts to simplify the business.

L&G’s operations span across retirement, retail and asset management. The business is going through a streamlining effort, with a couple of non-core businesses being sold down and a recent combination of the public and private asset management units.

We’ve been pleased to see asset management get some attention. Returning to, and then exceeding, historical profit levels here is key. There’s new leadership in place for the division, and while investment has led to cost-to-income ratios deteriorating, we should start to see the benefits soon.

Pension risk transfers (PRTs) are core to operations. These see L&G 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 managed by the new Asset Management division. This circular flow within the business enables L&G to deliver strong margins on its bulk annuity business, a core benefit of the model.

The UK is the most mature global market, but L&G has its eyes set further afield. The new partnership in the US means L&G can ditch its US protection business, which doesn’t quite align with the broader strategy, while retaining a strong foothold in the US PRT market. We think it makes a lot of sense and are pleased to see things progressing as planned.

Income is a key part of the investment case, and the forward dividend yield of around 8.6% looks attractive, as does the potential for capital returns through buybacks. The balance sheet is in a very strong position, which supports ambitious return plans. Management sounded confident it could deliver better shareholder return growth than previously expected, though nothing is guaranteed.

Backed by a new CFO, we think medium-term targets could be upgraded in the next year or so. The group is already ahead in several key areas, and simplifications are underway to help investors gain a clearer picture of where growth is coming from – a move we support.

There are many strings to L&G's bow, with bulk annuities at its core. We see the market staying healthy over the medium term, the valuation doesn't look too demanding, and the income profile is attractive. There are near-term risks, though, especially with economic conditions across the globe coming under pressure.

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.

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.

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