Legal & General reported full-year operating profit of £2.5bn, up 12%. That was driven by the Retail division, where profit rose 33% as it released provisions due to changes in mortality assumptions. The only division to see profit fall was Investment Management, where market moves impacted the value of investments.
New pension risk transfer business rose to £9.5bn, up 32% and written at "attractive" margins.
Cash generation of £1.9bn was up 14%. The solvency II ratio, a measure of balance sheet strength, rose to 236% (2021: 187%).
2023 is off to a "good start" with a step up in pension schemes approaching the insurance market and higher demand for individual annuities.
The board proposed a full-year dividend of 19.37p, up 5%.
The shares fell 2.2% in early trading.
View the latest Legal & General share price and how to deal
Our view
Despite record operating profit that beat expectations, the market's reaction to full-year results was a little muted. That's mainly because one-off events like the release of provisions from a change in mortality assumptions drove the performance. However, we saw this as a solid set of numbers on the whole.
The turbulent bond market over 2022 did no favours for the investment portfolio, which saw £225bn wiped off its value, but L&G is set to benefit in other areas. That's because a significant part of the business is its pension risk transfers (PRTs).
These 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).
Demand for bulk annuities is growing, and as well as already having a dominant UK position, L&G is increasing activity in overseas markets like the US and Canada. The US market's huge, with $3.0tn of defined benefit pension schemes, and only around 9% of that has already moved to insurance companies like Legal & General. It's a small fish for now, but the opportunity is significant.
International customers are also accounting for an increasingly large slice of the assets under management in LGIM, reducing reliance on UK savers. We mentioned the drop in asset value earlier, but more importantly, external net inflows continue to grow, particularly in higher-margin areas such as thematic ETFs.
We'd be remiss not to mention the group's formidable solvency II ratio, which is a core measure of capitalisation. At well north of 200%, this offers the group some resilience from adverse economic developments. Though, that doesn't make it immune to pressures. A sharp fall in equity or property markets would have a negative impact.
We also note that cash and capital generation remain strong, up 14% and 10%, respectively. That puts the group on track to hit its target of £8.0-£9.0bn in cumulative cash and capital generation by 2024 - even with no growth from here that'll be met. The growing dividend looks well covered at current levels. No dividend is ever guaranteed.
Overall, we think focusing on growth is the right decision in the long term - especially as competitors are increasingly keen to muscle in on the bulk annuity business. The 7.8% prospective dividend yield should still be enough to keep shareholders happy. Please remember yields are variable and not a reliable indicator of future performance.
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.
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.