■ Cash generation of £650m in 2009
■ Annualised cost savings of £65m beat target of £50m
■ Surplus capital of £3.1bn above regulatory requirement
Legal & General's remarkable success at doubling cash generation to £650m in 2009 came in the wake of the UK's second largest life assurer's decision to reduce business volumes in traditional capital-intensive life and pension products in favour of more capital-efficient products such as self-invested pension plans (Sipps) and unit trusts. This helped to boost the sale of retail investment products by 64 per cent to £375m.
L&G's financial strength was further enhanced by annualised cost savings of £65m against a targeted £50m, and increasing surplus capital over and above the minimum level set out by the Insurance Group Directive (IGD) from £1.9bn in 2008 to £3.1bn. The group's investment management side continued to attract strong inflows of £33.3bn, although outflows reduced this to a net inflow of £8.8bn, boosting assets under management to £315bn.
However, L&G's core business remains under pressure. Protection insurance was hit by the slowdown in the housing market, while a selective approach to pension buyout business meant that overall new business fell by 25 per cent to £366m. In fact, total annuity business fell by a third to £186m. There was more cheer on the savings side, with new business growth of 3 per cent generating net inflows of £1.7bn.
CREDIT SUISSE SAYS..
Outperform. Legal & General has beaten our forecast for operating cash flow and the IGD surplus is substantially higher than expected. New business, while lower, was in line with expectations at £1.39bn, while the bulk annuity side of the business remains under severe pressure. Expense savings were greater than expected, and L&G believes that more synergies can be achieved. Recent weakness has left the shares trading at 76 per cent of embedded value and nine times 2010 IFRS EPS estimates. However, there remains some uncertainty about whether last year's dividend reduction will be reversed. Expect pre-tax profits of £923m and EPS of 11.3p.
KILLIK & CO SAYS...
Sell. Individual protection new business fell by 12 per cent due to the subdued housing market, and group protection new business was 15 per cent lower due to pressure on corporate payrolls - we expect both of these headwinds to remain in place for now. L&G has a significant exposure to the low growth UK market, balance sheet sensitivity to risk assets and the potential for higher capital requirements as part of Solvency 11 rules. The company has been mooted as a possible bid target, but we would use any meaningful rise in the share price to sell and seek more reliable growth opportunities.
