Legal & General reported a 6% rise in core operating profit to £1.6bn, in line with expectations. Performance was driven by the retail and institutional divisions, partly offset by declines in asset management.
Pension risk transfer (bulk annuity) business totalled £10.7bn. There was also record volumes of retail annuity business, at £2.1bn. Assets under management fell 2% to £1.1trn as L&G shifted toward higher margin products.
The solvency II coverage ratio, a measure of balance sheet strength, improved from 224% to 232% over the year.
A final dividend of 15.36p was announced, taking the full-year total to 21.36p, up 5%. The board also approved a new £500mn buyback, in addition to the £1bn already announced when the US protection business is sold.
The shares fell 1.7% in early trading.
Our view
Full-year results were broadly as expected, with profits moving in the right direction. There was some slight weakness in some of the secondary metrics like margins for retail annuity business, but performance overall was positive.
L&G’s operations span across retirement, retail and asset management. The business is going through a streamlining effort, with a couple of non-core businesses being sold down and last year’s combination of the public and private asset management units.
We’ve been pleased to see asset management get some attention, given recent performance has disappointed. Returning to, and then exceeding, historical profit levels here is key. There’s new leadership in place for the division, and while investment last year meant cost-to-income ratios went backwards, the benefits should start to come in 2025 and beyond.
Higher interest rates have also been causing some trouble for assets under management, though things are starting to stabilise. At the same time, higher rates are benefiting the retirement businesses.
Pension risk transfers (PRTs) are core to operations. These see L&G 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 managed by the new Asset Management division. This circular flow within the business means L&G can deliver strong margins on its bulk annuity business, which is a core benefit of the model.
The UK is the most mature global market, but L&G has its eyes set further afield. The new partnership in the US means L&G can ditch its US protection business, which doesn’t quite align with the broader strategy, while retaining a strong foothold in the US PRT market – we think it makes a lot of sense.
Income is a key part of the investment case and the forward dividend yield of around 9% looks attractive, as does the potential for capital to be returned through buybacks. The balance sheet is in a very strong position which supports ambitious return plans, though nothing is guaranteed.
There are many strings to L&G's bow, with bulk annuities at its core. We see the market staying healthy over the medium term and the valuation doesn't look too demanding to us. There are near-term risks though, especially with economic conditions across the globe coming under pressure.
Environmental, social and governance (ESG) risk
The financials sector is medium-risk in terms of ESG. Product governance is the largest risk for most companies, especially those in the US and Europe with enhanced regulatory scrutiny. Data privacy and security are also increasingly important risks for banks and diversified financial firms. Business ethics, ESG integration and labour relations also contribute to the industry’s ESG risk profile.
According to Sustainalytics, Legal & General’s overall management of material ESG issues is strong.
L&G's board of directors oversees sustainability, with 30% of executive bonuses linked to ESG factors, and the company ensures cybersecurity through certification. Despite promoting business ethics and having an anonymous whistleblower channel, it could improve transparency in customer due diligence and employee training on responsible marketing.
Legal & General key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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.
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