Insurance giant Legal & General (LGEN) has released a statement saying it is on track for a record year for 2017. This should be grounds for investor cheer but could this FTSE 100 stalwart be hurt by changing market conditions?

Colm Kelly, analyst at UBS, certainly thinks so. He has a ‘sell’ rating on the stock and says the company’s ‘balance sheet risks merit more scrutiny given macro vulnerability and increasing UK uncertainties’.

In August, he wrote that Solvency II (a new set of rules governing how insurers are funded and governed) and a new reinsurance strategy for bulk annuities will reduce underlying cash generation growth for Legal & General.

That begs the question whether the company’s dividend is sustainable; a pressing issue given that many investors are attracted to the stock as an income play.

WHAT IS L&G SAYING TODAY?

Investors don’t appear to share Kelly’s concern, judging by how the shares have performed this year. They are up 6.7% year to date, outperforming the FTSE 100’s 2.9% gain over the same period.

The company’s upbeat statement today adds another 1.4p to its share price to 263p as it reports a boom in its retirement business.

Legal & General has generated £3.3bn of UK bulk annuity sales so far in the UK and doubled US sales to $0.7bn on a year-on-year basis.

Chief executive Nigel Wilson says ‘our core business divisions are generating formidable momentum’.

Its asset management division has seen inflows of £38.1bn to October. In its general insurance division the company has reversed the losses it suffered in the first half of the year with ‘management action’.

WHAT’S NOT TO LIKE?

UK life insurance companies are subject to investment and regulatory risk. According to UBS, Legal & General’s annuity and protection business exposes investors to longevity and credit risk.

Those premiums being paid have to go somewhere and as the company has its own asset management division it should be well versed in avoiding too much investment risk.

But its asset management business exposes investors to risks of declines in global stock markets which after eight years on a bull run may experience a correction in the not-too-distant future.

Any downturn in investment performance could also hit Legal & General Investment Management’s fund flows and performance fees.

The company on 13.3-times 2017’s forecast earnings of 19.71p per share. With a dividend yield of 5.8% the attraction of this stock is clear but given its exposure to global markets any downturn could wound this company.


Issue Date: 07 Dec 2017