Legal & General delivers inflation-beating income

The market was less than impressed with the half-year results for life insurance and asset management giant Legal & General (LGEN), which were already complicated by accounting changes demanded by IFRS 17 rules, which knocked £5bn from total shareholder equity. The changes also showed that not all of the company's business units were performing in harness and, despite meeting most of the City’s consensus forecasts, the company's shares were still the biggest FTSE 100 fallers on results day.

The main issues seemed to be at Its asset management arm, LGIM, which saw operating profits slide by 29 per cent to £142mn as difficult conditions for asset management continued to affect the company’s overall results. The impact of higher interest rates meant that investors pulled funds and placed them either into cash or longer-term government bonds – which are currently posting decent yields. This meant that total assets under management (AUM) fell by 11 per cent to £1.16trn as net outflows of £132bn in the half found their mark. As a result, LGIM’s management fees fell by a similar proportion to £431mn.

Investors can be relieved that the pensions risk transfer business (PRT), which is handled by Legal & General Institutional (LGRI), is enjoying its best market conditions in decades as in-profit defined-benefit schemes offload their liabilities onto the life insurance industry – a task made considerably easier by higher long-term interest rates lifting such schemes into surplus. The division generated net surplus capital of £752mn (from £825mn in 2022), with PRT’s capital strain coming in at 2 per cent. L&G wrote £4.9bn of PRT business in the half and reckons it can write about £11bn of new business annually without affecting its solvency ratios.

The retail business, which includes annuities, saw operating profits fall by 22 per cent to £230mn because a prior-year uplift from fintech valuations was not repeated in this half. This was offset by the performance of L&G’s alternative lending operation, which saw a 13 per cent increase in profits to £296mn.

Broker Panmure Gordon said the company is benefiting from a Brexit dividend, in the sense that it looks well placed to profit from investments in a wider range of illiquid assets after regulatory changes. Panmure has L&G on a forward price/earnings ratio of 8.7 times earnings for 2023, with a prospective dividend yield of 8.7 per cent. With inflation-beating income, the shares look a decent bargain. Buy.

Last IC View: Buy, 262p, 8 Mar 2023