Legal & General dominates UK pensions market and offers 9% yield

Results for Legal & General (LGEN) were notable mainly for being the first under new chief executive António Simões, who took over in January from previous incumbent Sir Nigel Wilson. The company largely delivered what it said it would: a dividend growing by 5 per cent annually and consistent solvency II capital generation of £1.8bn. However, there was a measure of disappointment that the company did not outline its future strategy in more detail, preferring to leave this until a capital markets event later in June.

Still, inevitably with life insurers the headline results were awkward to interpret as underlying changes in investment returns and restated accounts for 2022 (to take regulatory changes on board) made reported comparisons difficult. Investment variance was the main culprit for the fall in reported profits, which fed through to a lower return on equity of 9.7 per cent (2022:15.6 per cent), although the company expects that variance to average out to zero over time.

However, operating profits before adjustments were largely stable at £1.66bn, with organic capital generation covering the cumulative dividend payment of £4.5bn, with £0.8bn to spare.

The security of the payout isn’t really in doubt as LGEN carries capital in excess of its regulatory requirements of £9bn. This helps underpin management’s confidence that the company can eventually pay out total dividends in the range of £5.6bn-£5.9bn.   

Simões' ability to adopt a strategy that is radically different from his predecessor is limited, based on the fact that the pension transfer business, whereby the liabilities of company pension funds are transferred to the insurance industry, has rapidly become Legal & General’s biggest source of profit in the aftermath of significant interest rate rises and the maturing of many defined-benefit pension schemes.

Legal & General’s institutional business (LGRI), which handles the bulk annuities trade, contributed £886mn of operating profit, or 53 per cent of group operating profits, and showed growth during the year of 10 per cent, which was by far the best segmental result. With bulk annuities set for a least a few years of growth on the back of higher interest rates, and few serious participants entering the space, LGEN would appear to have the UK pensions transfer market largely sown up.

Legal & General shares are fundamentally a bargain at nine times earnings based on FactSet consensus. With the 9 per cent dividend yield thrown in, LGEN can claim to be the leading income share on the market. Buy.

Last IC view: Buy, 225p, 15 Aug 2023