The backdrop for life insurers may not seem that agreeable, Legal & General Group PLC (LON:LGEN) seems to be in a sweet spot, investors and analysts think.
Despite persistent low interest rates, relatively muted equity markets, weaker credit markets, gently lifting bond yields in Europe but not the US, and with the wider life sector’s earnings and dividend growth to be in line with the wider market, shares in the FTSE 100 group had been trading near all-time highs before the coronavirus sell-off.
Having sunk from above 320p to nearer 250p in February, the publication of annual results on Wednesday saw the shares on the road to recovery, with some analysts flagging up the special features of this financial sector giant.
READ: Legal & General hikes dividend after cutting mortality expectations
“I think Legal & General has managed to marry together two major trends – bulk annuities and low cost tracker investing – into a powerful, mutually reinforcing combination,” said Nicholas Hyett, an analyst at Hargreaves Lansdown.
Winning bulk annuity deals from the likes of Rolls-Royce, National Grid and Hitachi Data Systems, Legal & General’s core ‘Retirement’ division grew profits 27% to £1.4bn in 2019.
Not only are these profits very nice in and of themselves, but they feed into the rest of the group via the structure of the sprawling business model into some of the group’s other three divisions.
The four limbs of L&G are generally all “complementing each other nicely”, says Hyett.
“Bulk annuity premiums are managed by LGIM [the investment management business], which also works with other defined benefit pension schemes on low-cost and liability-driven investment.
“Those LGIM customers become future bulk annuity customers.”
Other companies are of course getting in on the action with similar models, but as Hyett points out, Legal & General was an early entrant “and its whole business model is geared towards servicing those two customer groups - that makes it difficult to compete with”.
“Overall the multi-layered approach to serving customers means a growing position in annuities is far more attractive than it might have seemed a few years ago, and long term, cash generative, relationships are underpinning a steadily growing dividend.”
Blots on the copybook?
Analysts at UBS said the constituent parts may have been good, but overall the results showed a “mixed” performance for the second half of the year.
Operating earnings by division in-line with expectations but the combined profit was 9% below consensus forecasts, as the group saw higher costs and a weaker general insurance result.
Lifetime mortgage sales also dipped in the results, through given the pace of expansion in a market where some have slight concerns about future regulatory risks, a disciplined approach is “welcome” said Hyett.
The company was also, of course, doing a job of highlighting its plus points, with chief executive Nigel Wilson trumpeting Legal & General's self-proclaimed “strategy of Inclusive Capitalism” and that the increasing focus among consumers, investors and the government on net-zero carbon, ESG investing and investment in UK regions “plays to our strengths, creating future growth opportunities”.
While creating a sense that Legal & General is a “force for good” seems like just blatant advertising, Hyett argued that it does “reflect several things the group is genuinely investing in – low cost investing through trackers, social housing through the capital division and salary finance through insurance are all good examples”.
He acknowledged that these are first and foremost profitable opportunities, but said they also have “positive externalities – to use economics jargon –that benefit wider society”.
“Is it ESG-washing or a genuine shift? That’s probably something you’d only really know on the inside, but recent actions do seem to match up with the words.”
Analysts at Barclays recently said L&G was their most preferred stocks in the sector for dividend yield, despite the ongoing question around the viability of European savings business being here to stay.
The ability to grow underlying earnings per share by 10% and the dividend per share by circa 7% for the foreseeable future, “makes it one of the most attractive names in the sector”.