This week I am looking at life insurance company, Legal & General. The company updated the market with full year 2018 results in March, paying out a dividend totalling 16.42p per share, equivalent to a yield of 5.9%.
Recent growth at the company has been driven by the ongoing purchases of bulk annuity books. This strategy entails Legal & General purchasing closed books of defined benefit annuity schemes at a discount to the underlying asset value, where sellers are looking to remove these liabilities from their own balance sheets.
Legal & General are able to fund and maintain these purchases through their other divisions, LG Capital and LG Investment Management, which reduces costs and allows the company to retain control over the whole process. This remains a strong business strategy whilst interest rates and therefore discount rates remain low and attractive.
The company has also been returning excess funds to clients from its longevity reserves. These are funds set aside to continue paying out annuities as people live longer. However, mortality rates have been falling over the last few years, with the life expectancies for both men and women over 65 deteriorating. This trend continues, as per 2018 government data, which is allowing the company to continue to return these excess reserves to shareholders.
Legal & General have recently ramped up their exposure to equity release through Lifetime Mortgages. Whilst this market has been around for a good number of years, the attractiveness and structure of equity release from privately owned residential property has begun to gain traction. The company has gained around a 30% share of the UK market, where this business is replacing the run down of individual annuities.
Management continue to demonstrate and deliver on their growth plans whilst returning excess funds to shareholders. Whilst the company’s fortunes will continue to be dominated by the vagaries of global markets it remains well capitalised to weather any volatility.