Legal & General rides out turbulence

Legal & General (LGEN) showed considerable resilience in its half-year results as rising interest rates started to make their impact felt in the annuity market and the company’s insurance reserves. The rising tide meant the life insurance provider saw surplus capital generation rising by 14 per cent to £946mn, and meant it was able to continue the long unbroken rise in its already chunky dividend.

Interestingly, the shares didn’t really react on the day as the market seemed to take umbrage at the narrow miss in the group’s solvency ratio, which came in at 212 per cent, compared with the 215 per cent that management had pointed to in a prior trading update. It is fair to say that this sentiment may be overdone; the results clearly showed that Legal & General was able to organically generate excess capital across almost all its business lines.

The institutional business (LGRI), which is the biggest by net premiums written, saw profits rise by 7 per cent to £560mn. Rising interest rates affect the annuity market by prompting pension asset managers to transfer defined benefit liability risk to the life insurance industry. Rising rates mean the funding gap between income and liabilities has significantly narrowed since the Bank of England started raising interest rates, which allows an easier transfer of risk to LGRI, with the increased activity obvious in its half-year performance.

Legal & General’s other big divisions, direct investment arm LGC and LGIM, which specialises in alternative and general asset management, both saw more modest performance. LGC’s profits were up by 5 per cent to £263mn. By contrast, LGIM, being a general asset manager, was more exposed to market turbulence and profits here were essentially flat at £200mn.

Management reaffirmed its guidance for the long-term outlook on dividend and capital generation. LGEN expects to pay out between £5.6bn-£5.9bn in dividends by 2024 and to generate cash and capital of between £8bn-£9bn.

Legal & General's results were positive and income investors will continue to appreciate the high-yielding dividend. The life sector is largely unaffected by inflation concerns, which have decimated the valuations for general insurers, by contrast. Broker Berenberg said the share valuation will depend on how quickly LGC can achieve its total target for operating profit of between £600mn and £700mn by 2025. Berenberg forecasts EPS for this year of 36.16p, giving a forward price/earnings ratio of 7.4. Buy.

Last IC view: Buy, 252p, 09 Mar 2022