JPMorgan has weighed in on investor concerns surrounding Legal & General Group PLC (L&G), “one of the most preferred stocks in the European Insurance sector”.
The investment bank addressed investor pushbacks on the asset risks faced by the UK's leading writer of annuity and pension transfer business and the likely changes to reported profit and equity under IFRS17.
According to JPM, credit and property risks from the annuity asset portfolio pose a much smaller risk to the company's net asset value, capital, or earnings than market fears suggest.
It also dismissed concerns over L&G Capital's exposure to residential property, stating it was unlikely to have a large impact on earnings.
In the note it addressed the 20-25% cut to reported profit expected under IFRS17, saying it does not impact the economics of insurance products.
The bank emphasised that IFRS17 is a change in accounting, not the economics or cash flow of insurance products.
L&G has pledged to maintain a 5% compound annual growth rate in dividends per share through 2024, in line with JPMorgan's estimates.
JPM added that IFRS17 will better highlight the value generated from the high-margin pension transfer product, making it more comparable across the European Insurance sector.
Despite the recent announcement of L&G CEO Sir Nigel Wilson's retirement plans, JPMorgan remains positive on the company's prospects for strong and profitable growth in the UK pension risk transfer market.
The bank has lowered its earnings for L&G Capital in 2023 by roughly 15%, but given the unit accounts for only 15% of the group's operating profit, the impact on group earnings is minimal.
Repeating its overweight recommendation, JPM said the shares were worth 375p each.
Of the 16 banks and brokers following the stock 11 are positive. The remainder are neutral on the shares. The consensus share price target is 309p.
At 3.30 pm, the stock was changing hands for 260.7p, up 2.6%.