Legal & General boosted by Barclays upgrade

Legal & General shares gained on Thursday as Barclays raised its rating on the stock to ‘overweight’ from ‘equal weight’ and lifted the target price to 276p from 194p.

“We upgrade Legal & General to Overweight as we believe the risk of a UK recession has faded while the Solvency II capital requirements of writing bulk annuities is much more efficient than expected,” the bank said.

Barclays said the UK economy has proven more resilient than its economists had initially feared. Economists at the bank recently increased their 2017 fiscal year gross domestic product forecast to 0.4% growth from an initial estimate for a 0.5% contraction.

“L&G’s investment leverage of 6x its net assets is among the highest in Europe, and a recession is the one environment in which we would be uncomfortable owning a UK life insurer.”

Another concern for the bank was the potential impact of Solvency II, a regulation on capital requirements for insurers. Barclays thought it would be the “death knell for bulk annuities” but recent evidence has suggested otherwise.

L&G has written £6.3bn of annuities in the year to date, at a capital cost of £200m at 3% of premiums.

While it was supported by the £2.9bn acquisition of Aegon’s annuity portfolio, Barclays noted that underlying net capital requirement is only about 5%, as L&G uses longevity reinsurance, direct investments and equity release mortgages to improve capital efficiency.

Barclays estimates the Solvency II ratio has improved to 166% at 28 November, versus 158% at half year.

Shares rose 1.82% to 240.15p at 0949 GMT.