Legal & General (LON:LGEN) is by its very nature a business which should be viewed over the longer term, similar to the investment areas in which it operates, which can and indeed has led to some shorter-term variance and weakness.
As mentioned at its half-year results, the sector generally has fallen out of favour on a number of fronts, underperforming both its European counterparts and the wider market this year. The tepid outlook for the UK economy has been a hindrance, while weaker property markets, a level of heightened claims and a volatile bond market have all added to the general pressure. Higher interest rates are something of a blessing and a curse across its units, having a particularly negative effect for example on its Investment Management business.
As such, operating profit for the group was largely unchanged at £1.67 billion, and slightly shy of an estimated £1.75 billion. Within the overall number, the 19% decrease in its Investment Management business was offset by a jump of 10% in Retirement Institutional, where further progress across the geographies of the UK, US, Canada and the Netherlands underpinned growth prospects in the future. Certain accounting changes and a generally weaker output also saw profit after tax reduce to £457 million from a previous £783 million, the result of which has seen the shares understandably under pressure in early trading.
However, the shining light of the group is the virtuous circle created by its sprawling and largely interconnected businesses. The structure of the group allows the generation of assets through its bulk annuity, or Pension Risk Transfers (PRT) business, to then be managed by other parts of the group. At the same time, the increasing popularity of alternative risk assets is captured within its Capital business, which has exposure to the likes of commercial real estate and housing, which can then be used to the benefit of customers elsewhere within the overall group offering. For this period, the group saw the benefit of diversification with the likes of infrastructure, science and technology picking up some of the slack from property, although the year-on-year performance was largely flat.
Indeed, such is the dependency and connection between the units, a multi-decade customer relationship is usually achieved as the customer switches between requirements as time passes, from the initial investment and growth stage to the drawdown and withdrawal chapter. As such, the reliability of the relationship and the ongoing fees enables a certain visibility of earnings over the longer term.
The group set out a five-year plan in November 2020 and is confident of achieving the objectives. The strength of this year’s showing puts the group firmly on track, to the extent that even zero growth in cash and capital generation from here should still hit the desired target of £8 billion to £9 billion of cumulative cash and capital. This also spills over to the group’s progressive dividend policy, where a 5% increase to the dividend was delivered, taking the projected yield to a substantial 8.3%, underlining one of the group’s main investment attractions for income-seeking investors.
The group’s store of future profit, or CSM (Contractual Service Margin) is a measure of profit which will be released over time given the nature of investment and insurance products. In this period the CSM rose by 9% to £14.7 billion, providing not only an incremental increase to income but also some visibility on future earnings. In addition, there were record volumes across its insurance businesses, with £13.7 billion of institutional annuities and £1.4 billion of individual annuities, while US protection products saw $175 million of new business premium, largely enabled by a digital new business platform which is enabling robust growth in the region.
There is no doubting the longer-term potential for the savings and investment market, especially given ageing demographics and likely welfare reform. For L&G, an ability to participate in this market on a number of fronts, particularly the annuity and international angles should provide ongoing areas of growth. Its objectives are underpinned by its capital strength with a defined and visible shareholder return programme, while the planned Capital Markets event in June should shed new light on the group’s refreshed strategy and plans for the immediate future. However, the wider sector malaise of late has taken L&G with it, resulting in a share price decline of 7% over the last year, compared to a dip of 3.6% for the wider FTSE100, which comes despite a jump in the price of 14% over the last six months. This has also taken some of the shine from a cautious market consensus which now stands at a hold given the prevailing headwinds, albeit a strong one.