Legal & General expect to deliver double-digit growth in cash and capital generation at H1


Legal & General Group Plc (LON:LGEN) has had a good start to 2022. Operating performance is in line with our expectations. Solvency is strong, and we expect to deliver double-digit growth in cash and capital generation at H1.

·   LGRI (Legal & General Retirement – Institutional) has transacted £4.5 billion of global PRT business to 30 June 2022 (£3.1bn at H1 2021). This comprises £3.8bn of UK PRT (£3.0bn at H1 2021) and £0.7bn of International PRT (£0.1bn at H1 2021).

In the UK, highlights include:

o A £2bn+ follow-on transaction with a large UK pension scheme, executed under an umbrella agreement;

o c£370m buy-in with Heathrow’s British Airports Authority (BAA) Pension Scheme, securing benefits for more than 1,400 retirees;

o c£225m buy-in with Newell Rubbermaid UK Pension scheme, securing benefits for c1,700 retirees.

For our International business, highlights include:

o Writing our largest ever US transaction (over $550m), our third transaction with this client;

o A third Canadian deal for CAN$230m, as we start to build momentum through our strategic partnerships in Canada.

Volumes have been written at margins and capital strain that are in line with or better than our long-term average, largely driven by good asset origination and reinsurance terms.

We have a strong pipeline for the second half of the year and into 2023. Demand for global PRT is growing, as rising interest rates and widening credit spreads reduce pension deficits and allow more funds to consider de-risking. We have achieved self-sustainability on the UK annuity portfolio in 2020 and 2021, and expect it to be self-sustaining again this year.

·   LGC (Legal & General Capital) – the Group’s alternative asset origination platform – continues to perform strongly. We remain on track to achieve our stated 2025 ambitions: operating profit of £600-700m and fee-generating third party capital of £25-30bn.

o Housing is performing well and we are managing our supply chains effectively. CALA (our Build to Sell business) has sold over 1,520 units to 30 June 2022 (1,479 units at H1 2021). Revenues are c£700m (£610m to H1 2021)1. Reservations on private units currently stand at 90% of the full year target, giving confidence in the outcome for 2022.

o Our Alternative Finance (Pemberton) and Venture Capital (VC) investments continue to perform strongly. Pemberton expects total committed capital to be over €14bn (€10bn at H1 2021) and revenue to be over €44m (€31m at H1 2021).

o Our Urban Regeneration platform recently announced a partnership agreement with West Midlands combined authority to invest £4bn in regeneration, housing and levelling up across the West Midlands (see press release here).

o We were also pleased to announce recently LGC’s first US investment, with seed capital for a $4bn platform (Ancora) to fund major life science and technology assets across multiple regional US markets (see press release here). Ancora will start investing by August.

o We have seen notable progress in the flow of asset creation from LGC this year, which remains on track to deliver close to £1bn of new assets to LGRI over 2022, including Sky Studios Elstree.

·   In Retail, protection gross written premiums (GWP) were higher year on year; individual annuity sales and mortgage advances were lower:

o Retail protection new business was £85m (£105m at H1 2021). Retail protection GWP was c£735m (£714m at H1 2021).

o Group protection new business was £63m (£55m at H1 2021). Group protection GWP was c£285m (£274m at H1 2021).

o US protection new business was £48m (£43m at H1 2021). US protection GWP was c£575m (£512m at H1 2021).

o Individual annuity sales were £453m (£483m at H1 2021) and lifetime mortgage & retirement interest only advances were £338m (£414m at H1 2021).

The performance of Salary Finance (an employee benefits finance platform in which we have a 48% holding) remains strong. Both revenue and core profitability have continued to grow.

·   LGIM (Legal & General Investment Management) has achieved strong external net flows of over £50bn (£26bn at H1 2021), supported by a strong International contribution (more than half of the total) and ongoing growth in higher-margin areas including thematic ETFs, Multi-asset and Fixed Income. At half year, we expect the contribution to revenue from flows largely to offset the impact of market movements over the past year.

Our diversified, actively managed annuity portfolio continues to perform resiliently with no defaults, and with over £2bn more upgrades year to date than downgrades. The portfolio’s direct investments also continue to perform strongly, with 100% of scheduled cash-flows paid year to date, reflecting the high quality of our counterparty exposure. Our annuity portfolio is substantially cash-flow matched. The Group’s overall exposure to inflation is minimal.

The Group estimates its Solvency coverage ratio as at 30 June 2022 is c215%2, up at least 25 percentage points from FY 2021 (187%), principally reflecting the contribution from higher interest rates and strong ongoing operational surplus generation, and after paying the 2021 final dividend. Group cash-flows remain strong and return on equity is consistent with our c20% historic performance. As indicated at FY 2021, we expect to achieve £1.8bn of capital generation in 2022. Ratings from Fitch (AA-), Moody’s (Aa3) and S&P (AA-) remain unchanged, highlighting the ongoing strength of our business3.

Sir Nigel Wilson, Chief Executive, Legal & General, said:

“Our year-to-date operating performance is in line with expectations, with cash and capital generation running slightly ahead of our five-year ambition and ROE at c20%. This reflects the strong execution of our stated strategy – which is closely aligned to long-term structural growth drivers such as ageing demographics, investing in the real economy, and addressing climate change – both in the UK and, more recently, in the US. The Group’s overall exposure to inflation is minimal and our balance sheet is strong: the recent increase in solvency provides further security and optionality. We remain confident in Legal & General’s ability to grow profits sustainably and at attractive returns over the long-term.”

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