- Subdued growth in the annuities business
- Russian Dollar-denominated bonds an issue
Market conditions have been generally benign for life insurers and results for Legal & General (LGEN) fell into line with everyone else in the sector, as a rising bulk annuities market and better interest rates all combined to give both cash and capital generation a 12 per cent boost. The falling away of pandemic uncertainty also meant a return to growth for LGEN’s closely watched dividend payout. However, world events of the past two weeks have also entangled Legal & General’s investment arm in unexpected ways.
Sanctions against Russia means uncertainty for holders of either the country’s debt or its equities. With the Moscow stock exchange seemingly permanently closed and settlement almost impossible, the company’s asset management arm, Legal & General Investment Management (LGIM) put out a statement explaining that “only” 0.1 per cent of its assets relate to Russia in some way. That was confirmed by research from Bloomberg, though with the significant caveat that LGIM, along with BlackRock, is one of the top holders of Russian Dollar-denominated bonds. The Russian government has recently threatened that foreign bond holders will be paid in hugely devalued roubles because of sanctions, in what would be classed as a technical debt default.
In addition to the chill from the East, the only other notable shortfall was lower than generally forecast growth in the bulk annuities business. New business in this area, which caters to defined benefit pension schemes, was £7.2bn, compared with £8.8bn in 2020. In fact, the £5.3bn component generated by UK annuities seems to have significantly undershot what the market had been expecting, particularly after helter skelter growth over the past 18 months. However, this may prove a temporary blip as capital strain on new business in the second half was still less than 4 per cent – comparable with 2020 – which doesn’t point to a significant slowdown in new business.
Overall, Legal & General put in a solid performance and the shares rose at double the rate for the rest of the market. The stock is still coveted for its chunky yield and, with the shares priced at a PE of just seven times consensus earnings for 2022, that income buy case looks compelling. Buy.
Last IC View: Buy, 270p, 04 Aug 2021
|LEGAL & GENERAL (LGEN)|
|ORD PRICE:||253p||MARKET VALUE:||£ 15.1bn|
|TOUCH:||252-253p||12-MONTH HIGH:||309p||LOW: 225p|
|DIVIDEND YIELD:||7.3%||PE RATIO:||7|
|NET ASSET VALUE:||176p||SOLVENCY II RATIO:||187%|
|Year to 31 Dec||Net premiums (£bn)||Pre-tax profit (£bn)||Earnings per share (p)||Dividend per share (p)|