(LON:) is in the midst of a new chapter and is transforming, although given the nature of a business entrenched in investment, it is one which is viewed through the prism of the longer term.
The progress of the group is almost swan-like, with gradual movements masking some furious paddling underneath the water. The previously announced streamlining of the business into three core areas – Institutional Retirement, Asset Management and UK Retail – resulted in non-core sales during the year of its US Protection business for £1.8 billion and Cala for £1.35 billion, which will result in a further share buyback of £1 billion when the former is completed, in addition to the £500 million announced today. Indeed, the group intends to return some £5 billion over the next three years in dividends and buybacks. In line with its announced growth target, the increase to the dividend lifts the projected yield to a punchy 8.7%, paying investors handsomely to wait as the strategy unfolds.
Such financial largesse is enabled by the group’s robust balance sheet. Its Solvency Coverage Ratio, a key measure of financial strength, rose from 224% to 232%, with a target of between £5 billion and £6 billion in capital generation over the next three years. At the same time, L%G is targeting a Return on Equity which will exceed 20% by 2027, alongside brisk growth in its earnings per share metric.
In the meantime, the group is making strides as it enters its new phase. Pre-tax profit of £332 million compares with £76 million last year, while core operating profit rose by 6% to £1.62 billion. Each of the core units made significant if slightly separate contributions, led by the main Institutional Retirement business where operating profit rose by 7%, bolstered by £10.7 billion of global Pension Risk Transfers (PRT) being written, £8.4 billion of which emanated from the UK and where the pipeline remains busy.
Elsewhere, the Retail annuities business saw an increase of 48% to £2.1 billion, while the Asset Management arm now has £1.1 trillion of global AUM. The latter has probably been the main source of any investor concerns, with higher interest rates and increased investment in the business leading to a dip of 10% in operating profit over the period, although more positively the group is now seeing flows to higher margin products of late.
Even so, the shining light for the group is the self-feeding, virtuous circle which is created by its sprawling and largely interconnected businesses. The structure of the group allows the generation of assets through its bulk annuity, or PRT business, to then be managed by other parts of the group. 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.
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. Indeed, the group’s store of future profit, including the CSM (Contractual Service Margin) is a measure of profit which will be released over time given the nature of investment and insurance products. In this period the CSM rose to £14.8 billion, providing not only an incremental increase to income but also some visibility on future earnings.
There is little doubt as to the longer-term potential for the savings and investment market, 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.
Amid such lofty ambitions, the wider sector malaise and some disappointing investment returns from its asset management businesses over the recent past has weighed on the share price, which has declined by 1% over the last year, as compared to a gain of 9.7% for the wider , despite a hike of 9% over the last six months. Indeed, over the last three years the price is down 5% although has eked out a gain of 11% over the last five. Nonetheless, the revised strategy is underpinned by L&G’s capital strength and a defined and visible shareholder return programme, with the market consensus of the shares as a buy reflecting the long-term prospects.
