Legal & General Group (LSE:LGEN) remains an investment behemoth which is very much a long-term prospect, similar to the investments in which it deals.
This means that in the shorter term, the sector generally has fallen out of favour on a number of fronts, underperforming both its European counterparts and the wider market this year. The tepid outlook for the UK economy has been a hindrance, while weaker property markets, a level of heightened claims and a volatile bond market have all added to the general pressure. Indeed, the reduction in operating profit to £941 million from a previous £958 million shows some of this strain, although the number comfortably exceeded expectations of £834 million.
However, the shining light of the group is the virtuous circle created by its operating units. The structure of the group allows the generation of assets through its bulk annuity, or Pension Risk Transfers (PRT) business, to then be managed by other parts of the business. At the same time, the increasing popularity of alternative risk assets is captured within its Capital business, which has exposure to the likes of commercial real estate and housing, which can then be used to the benefit of customers elsewhere within the overall group offering. For this period, the group saw the benefit of diversification with the likes of infrastructure, science and technology picking up some of the slack from property and leading to an increase of 13% to operating profits in that unit.
Indeed, such is the dependency and connection between the units, a multi-decade customer relationship is usually achieved as the customer switches between requirements as time passes, from the initial investment and growth stage to the drawdown and withdrawal chapter. As such, the reliability of the relationship and the ongoing fees enables a certain visibility of earnings over the longer term.
The group set out a five-year plan in November 2020 and is confident of achieving the objectives. The strength of this year’s showing puts the group firmly on track, to the extent that even zero growth in cash and capital generation from here to 2024 would still hit the desired target of £8 billion to £9 billion of cumulative cash and capital.
The Solvency coverage ratio – a measure of capital strength and stability – now stands at a formidable 230%, against expectations of 225%. In addition, there has over the last year been a surplus of capital generation to the tune of £947 million, which provides the group with strong shareholder return headroom, particularly for the dividend. A further increase to the dividend takes the projected yield to around 8.4%, a clear attraction for investors wishing to benefit from higher total returns.
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As with many asset managers, 2022 was a tough trading environment and the Investment Management business was no exception. Operating profit fell by 29% at LGIM, primarily due to market moves, while the cost/income ratio rose to 68% from a previous 59%. Around £132 billion of value was removed from its portfolio given the volatility of the bond market in a theme repeating from the previous year. As such, operating profit for the unit fell by 29%, but again L&G is in this part of the business for the long game. In particular, it is increasingly focused on international expansion given the huge potential markets of the US and Asia. In Asia, for example, regional assets grew from $150 billion to $167 billion with international overall now accounting for 39% of total assets under management.
The longer-term potential for the savings and investment market is well documented, especially given ageing demographics and likely welfare reform. For L&G, an ability to participate in this market on a number of fronts, particularly the annuity and international angles should provide ongoing areas of growth. Its objectives are underpinned by its capital strength with a defined and visible shareholder return programme. However, the wider sector malaise of late has taken L&G with it, resulting in a share price decline of 18% over the last year, which compares to an unchanged return from the wider FTSE 100. This has also taken some of the shine from a cautious market consensus which now stands at a hold given the prevailing headwinds, albeit a strong one.
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