Legal & General Group PLC (LON: LGEN) – Demonstrating Continuous Earnings Growth with Ample Room for Growth

Legal & General Group PLC is a FTSE 100 listed Company, which provides financial services across the UK, and the US. The Company operates with four business segments - Legal & General Retirement (which manages individual retirement, and pension risk transfer business), Legal & General Capital (manages direct investments, and treasury assets), Legal & General Investment Management (which caters to retail and institutional investment management and workplace savings businesses), Legal & General Insurance and General Insurance business (deals in personal insurance needs). The Group is one of Europe’s most successful and biggest asset managers, with £1 trillion of assets under management. It is also a market leader in the UK for life insurance, bulk annuities, and other retirement products. The Company has offices in Europe, US, and Asia, which supports diverse sectoral and geographic distribution of assets.


 (Source: Presentation, Company Website)

Key Fundamental Statistics



Industry Outlook Dynamics

As per the publication from Research and Markets, the market size for global life insurance providers is expected to grow to US$ 3,586.96 billion by 2022 from nearly US$ 2,951 billion in 2018, representing a compounded annual growth rate of 5.0% during the period. The fundamentals of the industry remain strong with several growth drivers, such as increasing ageing population, climate change, and globalisation of the asset market.

Growth Prospects and Risk Assessment

The Group is a market leader with over 20% market share in UK Retail Protection insurance. The breadth and depth of resources underpin the strength of their business model. The Group has been a trusted brand for 200 years, which has a long-standing relationship with numerous clients. It has an established track record of consistent growth in operating profit across all divisions, and the further upside potential is supported by incremental growth in new businesses. Moreover, the Company is investing continuously in technology to become a digitally enabled insurer.


 (Source: Presentation, Company Website)

 The Group is focused on innovations and new techniques to deliver improved services and long-term value. It has a strong financial discipline, which helped the company to have a robust and effective balance sheet. The Company has been focussing on improving customer support, which has resulted in a higher level of customer satisfaction. Investment in future business helps in achieving further sales growth and operational efficiencies. The Company has an active management approach to deal with the default risks. LGEN continues to invest in technology, and its balance sheet remains robust, with a steady increase in the surplus regulatory capital.
 
However, Group performance is subject to some principal risks and uncertainties as the volatility in market conditions can adversely impact earnings and profitability. Moreover, legislative changes and new entrants can disrupt the market environment. The material failure in IT security and business processes can cause reputational damage and unanticipated financial loss. Further, the emerging threats of climate change can significantly impact the investment portfolio. Also, to meet the new regulations, the Group needs to implement new processes, failing to do so would increase the compliance risk.Acquisitions to match rapid transformation may increase integration risks, and expected synergies may not be achieved.
 
Segment Analysis

As discussed above, the Group classified the operations into four segments in FY19. Overall, the business divisions are focused on providing solutions related to pension risk transfer, investment management, capital investment, insurance, and retirement solutions.

The profitability highlights of the reportable segments can be seen in the image below:


 (Source: Presentation, Company Website)

Synopsis of Recent Developments

22 June 2020: The Company announced the publication of final terms for fixed-rate contingent convertible notes of £500 million (5.625 per cent). The issuance will strengthen the Group’s position for the recovery phase from Covid-19 slump.

18 June 2020: The Board of the Company appointed Ric Lewis as an independent non-executive director, with immediate effect. He will bring his extensive experience of over 25 years for supporting real estate investment strategies.

Measuring Operational Key Performance Indicators

During the FY19, the Group’s capital position remained strong, with a £7.3 billion Solvency II surplus with a coverage ratio of 184%. Moreover, the well-diversified annuity assets increased to £75.9 billion (20% increase from FY18).

In terms of total shareholder’s return (TSR), the Group outperformed the sector and FTSE 100, by delivering TSR of 40% in 2019.

 

(Source: Presentation, Company Website)

Top Shareholders Statistics


 

Issue of RT1 Debt and Reinforcing Balance Sheet Strength (16^th June 2020)

Legal & General Group announced to capitalise on the encouraging bond market conditions through issuance of GBP denominated Restricted Tier 1 notes and expects to receive BBB rating for S&P and Baa3 rating by Moody’s. The issued debt will position LGEN strongly during the covid-19 recovery phase. The Group has a resilient operational performance, robust solvency position and a strong pipeline of new business. The Company’s asset portfolio continues to perform well based on the relative and absolute terms. LGEN has a strong balance sheet and expects shareholder solvency ratio in between 162 per cent to 167 per cent in H1 FY2020. Based on an active asset management and thoughtful asset allocation, the Group’s annuity portfolio of GBP 76.9 billion continues to outperform markets. LGEN remained well placed to deliver attractive and strong returns and growth in its core markets.

Financial Highlights - Good financial Performance in FY2019 (31^st December 2019)


(Source: Annual Presentation, Company Website)
 
For the financial year ending 31^st December 2019, the Group attained a total return of more than 40 per cent for investors, reflecting the consistently reported robust performance of the business and greater political and market clarity towards the year-end. Operating profit from continuing divisions surged by 17 per cent to £2,514 million, with all businesses delivering growth over the prior year. The operating profit for the financial year 2019 rose by 12 per cent to £2,131 million, excluding mortality release. The Group has continued to deliver a robust IFRS ROE of 20.4 per cent. The Board has proposed a final dividend per share of 12.64 pence, giving a full-year dividend per share of 17.57 pence, 7 per cent higher than 2018. The Company has achieved the five-year ambition of 10 per cent EPS (earnings per share) CAGR (58 per cent growth over the period) in just four years, reporting underlying EPS of 28.66 pence in 2019 (16% growth YoY).

Financial Ratios – Strong Profitability and Liquidity for FY2019 versus Industry Median



 In the financial year 2019, the Insurance Metrics of Legal & General Group remained strong as compared to the industry median. The Group’s investment ratio, the premium earned, and reserves are higher as compared to the industry. On leverage front, the debt-equity ratio of the Legal & General Group Plc’s was 0.58x, which was higher as compared to the industry median of 0.36x, reflecting that the company is more leveraged as compared to the industry.

Share Price Performance Analysis


Daily Chart as on 20^th July 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On July 20, 2020, at the time of writing (before the market close, at 9:02 AM GMT+1), Legal & General Group Plc shares were trading at GBX 225.50, down by 0.84% against the previous day closing price. Stock 52 week High and Low were GBX 324.70 and GBX 138.00, respectively.

Bullish Technical Indicators

From the technical standpoint, shares were trading above the short-term support level of 20-day, 30-day and 50-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology

Price/Book Value Approach (NTM)



To compare Legal & General Group Plc with peers, Price/Book Value multiple has been used. The peers are Prudential Plc (Price/NTM Book Value was 2.25), Hansard Global Plc (Price/NTM Book Value was 1.74), Hastings Group Holdings Plc (Price/NTM Book Value was 1.65), Hiscox Ltd (Price/NTM Book Value was 1.34) and Aviva Plc (Price/NTM Book Value was 0.65). The Average of Price/NTM Book Value of the company’s peers was 1.53x (approx.).

Legal & GeneralGroup Plc Vs FTSE-100 Index (3 Months)


(Source: Refinitiv, Thomson Reuters)

In the last three months, Legal & General Groupshare price has delivered 9.42% return as compared to 7.24% return of FTSE-100 index, which shows that the stock has outperformed the index during the last three months.

Business Outlook Scenario

The recent debt issuance shall bolster the position for the recovery phase from Covid-19. The Company has a strong new business pipeline to sustain the momentum of growth and profitability. The Group is anticipating a more sustained consumer demand for housing, which will strengthen the LGC (Legal & General Capital) division. The Board also highlighted that, notwithstanding significant market volatility, the Company’s Solvency position remains robust. In the long run, the Group will experience plenty of opportunities across pension risk transfer (PRT), defined contribution (DC) fund management, and affordable housing. Over the next five years, the Group intends to write £40 to £50 billion of UK pension de-risking business.
 
The Company has shown a decent financial performance in the financial year 2019. LGEN has shown decent operational performance, robust solvency position, a strong pipeline of new business and the asset portfolio are performing well. The Group’s annuity portfolio continues to outperform markets, reflecting active asset management and thoughtful asset allocation approach being followed. On 31st December 2019, the Company has an estimated Solvency II surplus of £7.3 billion over its Solvency Capital Requirement, corresponding to a Solvency II coverage ratio of 184% on a shareholder basis. On 28th February 2020, the Group estimated the ratio at 174%. The Group is planning to issue RT1 debt to capitalise encouraging bond market conditions and will position them strongly during the covid-19 recovery phase. Despite the uncertain economic environment, the company has attained a 5-year EPS CAGR of 10% in 4 years (58% growth since 2015).
 
Over the course of 4 years (FY15 - FY19), the company’s total income surged from GBP 12,701 million in FY15 to GBP 66,786 million in FY19. Compounded annual growth rate (CAGR) stood at 51.43 percent.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “BUY” recommendation at the current price of GBX 225.50 (as on 20^th July 2020, before the market close at 9:02 AM GMT+1), with lower double-digit upside potential based on 1.53x Price/NTM Book Value (approx.) on FY20E book value per share (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement. 

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