Legal & General Group PLC (LSE:LGEN) shares fell 2.6% to 248.30p after Jefferies downgraded the FTSE 100 insurer to underperform with a 185p price target, arguing that its income appeal is deteriorating and its shares face a valuation reset as investors rotate towards stronger alternatives.
Analysts Derald Goh and Philip Kett, who transfer coverage in the note, set their price target using the average of a sum-of-the-parts valuation of 164p and a target dividend yield approach of 206p, implying a 12-month total return of negative 19% after accounting for the stock's 9% dividend yield.
The central concern is L&G's net surplus generation (NSG), a solvency-based measure of free cash flow that the analysts consider more meaningful than reported earnings for a life insurer of this type.
Jefferies forecasts NSG of approximately £1.2 billion annually through 2028, roughly equal to the cost of the dividend, leaving no capital for buybacks or balance sheet strengthening.
The bank sits 8% below consensus on NSG across 2026 to 2028, a gap it attributes primarily to more cautious assumptions on management actions, the discretionary steps Legal & General takes to optimise assets and update liability assumptions.
Jefferies models management actions of just under £400 million per year, against consensus forecasts of around £500 million, and notes that more than half of recent management actions have come from liability optimisation, a less repeatable source than asset restructuring.
New business strain, the upfront capital cost of writing new bulk annuity contracts, is expected to rise sharply as the company's gilt-based underwriting strategy locks in lower initial spreads that must be recovered through future asset optimisation.
With solvency drifting to an estimated 177% by 2028, debt leverage remaining above 30%, and no buybacks expected through that period, Jefferies argues L&G compares poorly against peers, including Aviva and AXA, both of which offer similar or stronger cumulative yields with healthier balance sheets and lower reliance on management actions.
The analysts acknowledge the stock's 9% dividend yield screens in line with its post-2022 average, but argue this fails to reflect the weaker income profile relative to alternatives now available across the European insurance sector.