Market news and results from Legal & General.

Market News

The yuan slid to the weakest level since November and China’s sovereign bonds rallied after the central bank unexpectedly cut a key interest rate to boost its ailing economy. The PBOC cut the rate on its one-year MLF loans by 15 bps to 2.5% and lowered the seven-day reverse repo rate by 10 bps to 1.8%. July industrial output and retail sales missed. Fixed-asset investment from January to July was also worse than expected. Separately, authorities are considering cutting stamp duty on stock trades for the first time since 2008, people familiar said.

Japan’s GDP blew past estimates in the second quarter, expanding 6% on annualised basis. It was the fastest clip since the final quarter of 2020 and double forecasts. But the reading “was all export driven and masked rocky conditions in domestic demand,” Bloomberg Economics said. The BOJ might find that troubling as it’s counting on domestic factors to push up inflation, BE said.

US equity markets moved higher last night – S&P 500 (+0.6%); Nasdaq (+1.1%) – as a 7% surge by Nvidia surge led the mega-caps. This morning in Asia, markets were mixed: Nikkei 225 (+0.6%); Hang Seng (-0.6%); Shanghai Composite (-0.1%). The FTSE 100 is currently trading 1.0% lower at 7,430.

The 10-year Treasury yield continued to nudge higher to 4.20%, while gold slipped to $1,903 an ounce. The inflation-protected yield on 10-year Treasuries climbed more than 6 basis points to 1.84% in late New York trading, the highest level since 2009.

UK average weekly earnings growth accelerated to 8.2% year on year in the second quarter, faster than expected and up from a revised 7.2% previously, in a sign of continued inflation pressures. Wages excluding bonuses expanded at a record pace. The unemployment rate rose to 4.2%, against forecasts it would remain unchanged. Sterling trades at $1.2695 and €1.1624.

Source: Bloomberg

Company News

Legal & General has this morning released its half-year results and highlighted it remains on track to achieve its five-year ambitions. In response, the shares are down 2% in early trading this morning.

Legal & General is an integrated operator with established expertise in asset origination (Legal & General Capital) and asset management (L&G Investment Management), and in the provision of retirement and protection solutions to corporates and individuals (L&G Retirement Institutional and Retail).

The group’s strategy aims to focus on six global, long-term growth drivers which are structural rather than cyclical: ageing demographics; globalisation of asset markets; investing in the real economy; welfare reforms; technological innovation; and addressing climate change.

In 2020, L&G set out its five-year ambitions. Cumulatively, over the period 2020-2024, the group is targetting: cash and capital generation (of £8.0bn-£9.0bn) significantly to exceed dividends (of £5.6bn-£5.9bn); EPS to grow faster than dividends, with the dividend growing at 5% to FY2024; net capital surplus generation (i.e., including new business strain) to exceed dividends. In the first half of 2023, group operating profit fell by 2% to £941m.

Legal & General Investment Management (LGIM) is a leading global asset manager, ranking 11th in the world with £1.2tn of assets under management (AUM) of which £457bn, or 39%, are international assets. LGIM is a leading provider of UK and US Defined Benefit (DB) de-risking solutions, specifically through index, fixed income, and LDI strategies. In the first half, results stabilised somewhat, although operating profit fell by 29% to £142m, primarily due to the impact of rising interest rates on AUM, which decreased by 10% to £1,158bn.  Despite significant inflationary impacts, the group has taken action to keep absolute costs flat on a currency-adjusted basis. 

Legal & General Retirement Institutional (LGRI) is the market leader in UK pension risk transfer (PRT), focusing on corporate defined benefit pension plans. The group also operates in the US, Canada, Ireland, and the Netherlands, with more than £6tn of pension liabilities globally. H1 operating profit grew 19% to £471m, underpinned by the growing scale of back-book earnings and the consistent performance of the group’s annuity portfolio. LGRI executed higher new business volumes to address growing demand while maintaining pricing discipline – premiums increased from £4.4bn to £5.0bn, generating deferred profit of £0.4bn. In the second half, the group has already written a further £1.8bn UK and $1.0bn US PRT.

The Retail division is a market leader in life insurance, workplace pensions, and retirement income, covering about 10m UK retail policyholders’ and workplace members’ savings, protection, mortgage, and retirement needs. There is also a life insurance business in the US. Although performance in the first half was impacted by competition in some areas, the business was bolstered by growing annuity sales and progress in US protection. Operating profit fell by 22% to £230m, held back by a lower contribution from fintech.

Legal & General Capital (LGC) uses the group’s shareholder capital to provide the equity investment in, and to therefore manufacture, part of the direct investment portfolio used to back LGRI and Retail’s annuity liabilities, as well as creating assets for LGIM’s clients. The company invests across four main asset classes: Specialist Commercial Real Estate, Clean Energy, Housing, and SME Finance. In the first half, operating profit grew 13% to £296m, driven by the alternative asset portfolio.

Overall, the group has a robust capital position. Cumulative cash and capital generation is on track to meet the five-year target. To date, capital generation is £5.9bn, vs. the £8.0bn-£9.0bn ambition by 2024. The Solvency II operational surplus generation was little changed at £947m, with net surplus generation of £752m. The Solvency II surplus regulatory capital stands at £9.2bn over a capital requirement of £7.0bn. The group ended the half-year with a coverage ratio of 230%, vs 212% last year.

L&G has a progressive dividend policy reflecting expected medium-term underlying business growth. For 2023 half-year, the payout was increased by 5% to 5.71p. A similar rate of growth at the full-year stage will generate a yield of 8.7%. The group has now paid dividends of £3.6bn on the way to its ambition of £5.6bn-£5.9bn by 2024.

Source: Bloomberg