L&G delivers solid first half and pledges 'extremely busy' second

Legal & General grew first-half profits more than expected and, although the life insurer's earnings were down and cash returns lower than might be hoped, an "exceptionally busy" second half is anticipated.

Operating profits of £909m in the first six months of the year were up 5% on the same period last year and ahead of the £875m average analysts forecast as five out of the FTSE 100 group's six divisions increased profits.

These headline profits ignore the £126m of cash set aside from reserves last year's review of UK pensioner mortality, which is not repeated this half-year. But chief executive Nigel Wilson said management are reviewing long-term mortality assumptions and expect to make a full year release in the second half larger than the £332m released for full year 2017.

Taking account of the mortality reserve release, statutory operating profits fell 8% to £909m and profit before tax fell 19% to £942m, with an extra hit from an 81% decline in direct investments, mostly from a £90m loss from the traded assets portfolio of early-stage investment arm Legal & General Capital (LGC) "reflecting market performance versus our long term economic assumptions".

Earnings per share excluding the mortality reserve release fell 8% to 13p. The dividend was lifted 7% to 4.6p.

Of the group's divisions, Retirement increased operating profits 9% to £480m, with Institutional up 8% and Retail up 11%, with a strong performance from the annuity back book.

The investment management arm, known as LGIM, profit increased 5% to £203m, with management fee revenues up and assets under management rising 3.6% to £985bn helped by net inflows of £14.6bn as it expands in the US and further into in Asia.

LGC profits surged 21% to £172m as the direct investment portfolio swelled 54% to £2.0bn, boosted by the full acquisition of CALA Homes in March. Wilson said the division was "accelerating UK investment" through its Changing Britain programme, which he said reflects "growing regional devolution".

LG Insurance, the protection business, lifted profits 5% to £154m, which was lower than expected due to adverse mortality changes in the US, while the General Insurance arm swung to a loss of £6m from a £15m profit a year ago largely as a result of weather the first quarter.

"We expect to have an exceptionally busy H2," said Wilson. "We are currently actively quoting on over £20bn of UK pension risk transfer deals, including over £7bn of transactions in exclusive negotiations expected to close in H2."

He added: "We are confident that Legal & General is strongly positioned for growth in H2 and beyond."

With L&G focused on a cash generation and shareholder returns in recent years, analyst Paul De'Ath at broker Shore Capital said there were two areas where the headline numbers look weaker than expected: the net cash/capital release from operations and the lack of any mortality release. But he said both were down to timing issues.

On the face of it the 8% miss to consensus on net release from operations comes from a lower than expected positive new business strain from the annuity business, impacted by lower than expected bulk annuity sales in the first half.

"The difficulty with bulk annuities is that they take a long time to finalise and therefore the timing of the sales can be very lumpy in nature. L&G has highlighted that the quote pipeline remains very strong and in fact it is in exclusive negotiations with £7bn of deals that could complete in the second half (vs £1.1bn in H1 2018). This should provide some comfort that the lower cash generation is simply due to timing rather than any other underlying issue, in our view."

While many investors would have expected some cash release from L&G in the first half, as has been seen at peers and was made by L&G last year, De'Ath was reassured by Wilson's promise of an expected release larger than the £332m released last year.

"Overall the results look slightly ahead of expectations once the timing issues around the annuity book have been adjusted for and the outlook remains very strong as the structural growth opportunity from bulk annuities is set to be around for some time to come. The 7% growth in the dividend is solid but could be bolstered by greater growth at the final given the pipeline for reserve releases and annuity sales, in our view."