Join our community of smart investors

Legal & General throwing off cash

The life assurer's focus on bulk retirement deals continues to pay off
March 7, 2018

Shorter life expectancies aren’t usually cause for celebration, but there was one morbid benefit for Legal & General (LGEN) shareholders last year. Lower longevity assumptions meant the life assurer released an additional £206m of prudence from its reserves during the second half, taking the total mortality releases to £332m. However, even without this cash, its businesses put in a solid performance, with underlying operating profit up 12 per cent.

IC TIP: Buy at 257.8p

The retirement business led the way, growing underlying operating profit 13 per cent. The larger institutional operations completed £3.9bn in pension scheme buy-ins and buy-outs – insuring against and fully taking on the liabilities of the schemes – up from £3.7bn a year earlier. That was in addition to an £800m insurance transaction. The business also made good inroads overseas, particularly in the US, where it completed 15 bulk deals totalling $713m (£514m) in premiums, up more than half on the previous year.

On the retail side, individual annuities continued to rebound after the introduction of pensions freedom changes, with sales up more than three-quarters at £671m, underpinned by the highest volumes since 2014. The investment management arm gained £43.5bn in external net inflows, primarily into the ‘Solutions’ products, driven by strengthening demand from defined benefit/contribution schemes for liability-driven investment and multi-asset strategies. As autoenrolment continued to bed-in, workplace savings also increased a third to £27.7bn.   

Recycling its more mature assets helped lift the investment portfolio at the group's direct investment business by more than a quarter, with all the disposals executed at or above its internal rate of return. L&G also topped up its housing assets beyond the £0.5bn mark, completing its first investment in the later living sector and new build-to-rent sites via its joint venture. However, the general insurance business was the weak spot, with increased costs from non-weather related household claims pushing up the combined ratio – of claims to premiums – to 93 per cent, from 89 per cent.  

Bloomberg analysts forecast a consensus adjusted EPS of 25.7p during the year to December 2018, down from 25.7p the previous year.

LEGAL & GENERAL (LGEN)   
ORD PRICE:257.8pMARKET VALUE:£15.4bn
TOUCH:257.5-257.9p12-MONTH HIGH:280pLOW: 242p
DIVIDEND YIELD:6%PE RATIO:8
NET ASSET VALUE:132pSOLVENCY II RATIO:180%
Year to 31 DecGross written premiums (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)*
20136.161.3315.29.3
201410.201.4116.711.25
20156.321.4118.213.4
201610.251.5219.714.35
20177.932.0630.515.35
% change-23+36+55+7
Ex-div:26 Apr   
Payment:7 Jun