L&G’s need to shelter from economic headwinds becomes more urgent

Antonio Simoes told his colleagues in the weeks leading up to his formal debut as the new Chief Executive of Legal & General to the City that he has three priorities: To listen, listen, listen.

He has stated that his parents worked in the insurance industry, but he himself has never done so. He wants to spend more time learning about this complex field before making any strategic decisions.

Yesterday, the Portuguese-Brit announced that he would have three more months to think about this complex, sprawling business. He also said all of it would be revealed on a capital market day scheduled for June 12.

Simoes said, “I’m looking at everything.” Simoes was a McKinsey consultant like Sir Nigel Wilson, but he took a different path, working for HSBC UK in the UK. He added, “Now is the time to have a new perspective.”

‘s need for a new perspective grew more urgent when he announced 2023 operating profit of £1.67billion, which was significantly lower than the £1.75billion expected by analysts.

Analysts said that the poor profit performance was due to a decline in assets under management and write-offs of past ventures, including electric vehicles, modular housing, and other projects.

Rising Interest Rates Hit Asset Valuations. Operating profits dropped from £340m to £274m.

The core division of pension risk transfer continued to dominate, increasing operating profit to £886 millions by 10%. Pension risk transfer is the process of buying the assets and liabilities that are no longer needed by traditional defined-benefit schemes. The division has written a record £13.7billion in new business for the year, and announced recently a £4.8billion buyout of Boots Pension Scheme.

The other two divisions of L&G, L&G Capital (which specializes in alternative assets) and L&G Retail (which includes products sold directly to the public, such as personal annuities and life insurance), did not fare much better, with a “challenging’ environment causing them to essentially flatline.

Shareholders increasingly look for change, even if it is to boost a share value that has been largely declining for the last four years. Wilson’s reign from 2010 to 2020 was spectacularly effective, but has been less successful since then. The shares have fallen 0.8 percent since yesterday, after peaking at 318p before the outbreak of the pandemic.

The group confirmed that it was still on track to reach the end-2024 goals set by Sir Nigel Wilson back in 2020

The rising interest rates have affected most life insurers. They have impacted the value of their long-term assets and raised concerns about the credit quality. L&G’s portfolio of bonds is just above the “junk” category.

There are also other challenges, including criticism that L&G has a capital-inefficient approach and should use its surplus cash to buyback shares, or concerns about the UK being the only focus of the company, which investors find unattractive.

Most analysts believe Simoes inherited a fairly decent deck of cards, and that a modest adjustment to the controls will be enough to put it on a better path. It confirmed that it was still on track to reach the end-2024 goals set by Wilson back in 2020.

Analysts believe that Simoes can do more in the pension risk-transfer division to attract clients from abroad. Abid Hussain of Panmure Gordon said that Simoes’ job would be to expand the company’s international footprint. He cited the US, Canada and the Netherlands as examples.

The investment management industry has room for improvement. It is the largest in Britain, and the 11th largest in the world, with assets totaling £1.15 trillion. The cost-income ratio is too high. Hussain stated that the country has been deprived of investment.

The investment management arm relies on defined-benefit schemes that are closing and dying. Andrew Crean, from Autonomous, says that it is “a melting cube” at the heart of the offering.

Some people question the reason for the expansion of business. L&G is a large company that covers many areas, including serving clients globally with low-cost tracking products and providing lifetime mortgages for individuals.

Some believe that there are real synergies in the cross-selling of products and ideas. Rhea Shah, an analyst at Deutsche Bank, said that the components “fit together”. Simoes did not confirm yesterday that the business will remain intact, but praised the benefits of diversification which protected it from shocks. Last year’s huge increase in interest rates, for instance, hurt asset management, but increased pension risk transfer, annuity sales, and other financial products.

He shattered hopes for a share-buyback by sticking to the script from the Wilson years – that the board would prefer to use surplus capital to reinvest back into the business, but “wouldn’t hesitate” to give any surplus to shareholders.

Simoes’ surplus will look horrendous if it does not make acquisitions. The important measure of balance sheet strength – the key solvency ratio – increased to 224%. As expected, the total dividend increased by 5 percent to 20p.

Simoes explained that the pension risk transfer boom could last for five years or longer, but L&G must consider what will replace those revenues. His background in retail banking may encourage him to expand his consumer-facing operations. China is another long-term growth prospect. Hong Kong remains a small seedling for the time being.

New ventures can be difficult. Investment in the electric vehicle subscription service Onto was written off.

The shareholders will have to be patient. Simoes refused to acknowledge the need for even trivial changes, such as the colour of the golf umbrella logo which has remained unchanged since 1984.

He said, “I am constantly surprised by how popular it is.”