Legal & General (LON:LGEN) is viewed through the prism of the long term, being by its very nature a business entrenched in investment. This has led to some shorter-term weakness over the recent past, with higher interest rates and inflation providing some headwinds.
For this period, there was a robust performance from its retirement and retail arms, which offset some of the frailty in its newly created and combined Asset Management business. For the latter, increased investment in the streamlined unit as well as the market variances which have inevitably impacted mean that the new strategy announced at L&G’s Capital Markets event in June is in the formative stage of the benefits which should wash through. Post-tax profit of £223 million for the group as a whole represented a decline of 41% from the previous year’s £377 million, although more positively core operating profit of £849 million was a marginal improvement and was in excess of market expectations of £834 million.
Even taking into account the new strategy, 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.
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’s store of future profit, including the 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 8% to £13 billion, providing not only an incremental increase to income but also some visibility on future earnings. In addition, individual annuities doubled to £1.2 billion from £575 million, with an increase of 7% to £3.2 billion in Workplace pension flows and a jump of 18% to $103 million of new business within its US protection arm. Combined, the group has now written £5 billion of PRT in the year to date, with £24 billion of active UK PRT deals now in force.
Other metrics also showed signs of strong growth, such as a Return on Equity of 35.4% compared to 28.6% in the corresponding period. The Solvency Coverage Ratio, a key measure of financial strength, was stable at 223%, which underpins the ability for the group to place additional focus on shareholder returns, as outlined previously in June. The current aim is to increase the dividend by 5% this year and by 2% between 2025 and 2027, with share buybacks also a priority. The announced buyback of £200 million at that time is ongoing, while the increase to the dividend leads to a projected yield of 9.5%, well-covered at 1.9 times, and an exceptional example of attracting income investors while also paying shareholders to wait as the strategy unfolds.
There is little doubt as to 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 to its existing Asset Management AUM of £1,136 trillion.
However, the wider sector malaise and some disappointing investment returns from its asset management businesses over the recent past has weighed on the share price, which has declined by 5% over the last year, as compared to a gain of 6.3% for the wider FTSE100, and by 19% over the last two years. Even so, the group’s objectives are underpinned by its capital strength and a defined and visible shareholder return programme, with the market consensus of the shares as a buy reflecting the longer term prospects.