Legal & General reported underlying operating profits of £2.7bn, up 10% on last year. Declines in the institutional bulk annuities business were offset by growth elsewhere. The strongest performance came from the Capital business, which develops real asset investments like property for the rest of the group as well as managing its proprietary trading books.
A final dividend of 13.27p was announced, taking the full year payment to 18.45p - a 5% increase on last year.
The group's medium-term targets are unchanged, including for the dividend to grow at low to mid-single digits from 2021.
Legal & General shares rose 3.9% in early trading.
View the latest Legal & General share price and how to deal
Our view
Legal & General's pension risk transfer products and individual annuities are the engine room of future growth, and the key pivot on which Legal & General's highly integrated business model turns.
Pension risk transfers see Legal & General take on responsibility for paying some, or all, of the pensions from a company's final salary pension scheme (often called bulk annuities). In return the group receives a lump sum. That's then managed by Legal & General Investment Management (LGIM) and underpinned with real assets developed by the Capital division (which includes UK housing and infrastructure projects). LGIM's low cost tracker and liability driven investment strategies are also popular with other final salary pension schemes, who often become future bulk annuity customers.
We view this business model as a major competitive advantage, since replicating all the various areas of expertise is difficult and time consuming. We also think the end markets to which the group is exposed offer long term opportunities.
Demand for bulk annuities is growing, and as well as a dominant UK position, L&G is increasing activity in overseas markets like the US and Canada. We will admit that new business trends were a little more subdued than we'd like last year - but overall we're supportive of the direction of travel.
International customers are accounting for an increasingly large slice of the assets under management in LGIM too, reducing reliance on UK savers. Together with a leading position in passive investment products, that helped the group become the first £1trn investment manager in the UK. Growth has stormed ahead since then, with Assets Under Management (AUM) now well up on that landmark - driven by a formidable workplace pensions business and growing positions in international markets.
However, growing the annuity book is capital intensive.
In order to ensure pensions can be paid, regulators insist life insurers invest a portion of their own capital behind the product. Together with a debt pile that's higher than some might like, that's diverting cash away from shareholder returns.
We think a focus on growth is the right decision in the long term - especially as competitors are increasingly keen to muscle in on the bulk annuity business. A 7%+ prospective dividend yield should still be enough to keep shareholders happy - although as ever the dividend cannot be guaranteed. If that comes with improvements to the balance sheet, then so much the better.
Legal & General key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Half Year Results
Legal & General's Institutional Annuities business reported operating profits of £1.2bn, broadly flat on the previous year. That reflects a positive performance from the bulk annuity business, and new business growth. This was offset by the lack of mortality reserve releases, as expected. The group wrote £7.2bn of new business at a Solvency II margin of 9.1%.
The group's Retail Annuities business reported operating profits of £352m, up 9%. That largely reflects positive mortality releases. The division saw individual annuity sales rise 5% to £957m, growing market share, while lifetime mortgage sales rose 7% to £848m. Net Workplace inflows rose around £700m to £8.5bn.
Legal & General Investment Management reported operating profits of £422m, up from £407m. Management fee revenue rose 5.5% to £980m, while assets under management rose 11% to £1.4trn.
The rebounding housebuilding market helped operating profit rise 68% to £461m in Legal & General Capital. Residential property and Equities are the biggest asset-types across the Capital asset portfolios.
Legal & General Insurance reported operating profits of £268m, up from £189m. Total gross premiums rose almost 2% to £2.9bn.
The group's Solvency II ratio, a key measure of insurers capitalisation, came in at 187%, up from 175%.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.