Legal & General profits edge higher in cautious first half

Legal & General increased first-half profits by almost a quarter as strong growth from the annuity arm offset declines at investment management and insurance.

Adjusted group operating profit in the half-year to 30 June increased 10% on the same period last year to £822m, with earnings per share up 24% to 11.27p or up 14% to 11.20p if adjusted to exclude the £4m profit in relation to the disposal of Suffolk Life.

Net cash generation swelled 16% to £727m and the group delivered a 20% return on equity.

With the new progressive dividend policy adopted in March 2016, why board has decided to pay a 30% of the annual payment at the half-year stage, meaning this term's interim payout was calculated to be 4p per share - implying a full year payout of 13.3p.

From a balance sheet perspective, L&G's Solvency II surplus at the half year was estimated at £5.3bn, representing a coverage ratio of 158%, with eligible own funds of £14.3bn and the solvency capital requirement of £9.0bn.

Chief executive Nigel Wilson said L&G was continuing to execute its strategy well and that the strong balance sheet offers flexibility and capacity to invest in support of each of our businesses.

Looking forward, he added: "There are many different views of the outlook for economic growth, the state of financial markets and political uncertainty. We reflect this in our approach to risk management.

"While we cannot be immune to this uncertainty, we remain confident that we will continue to deliver attractive returns for shareholders, great value to customers and better outcomes for society. Our five long-term growth drivers, ageing populations, globalisation of asset markets, creating real assets, welfare reform and digital remain unaffected and will continue to provide many growth opportunities."

With the lifetime mortgage market growing 24% in the first half of this year to £934m and on track to exceed £2bn for the first time in 2016, the group in aiming to write up to £500m of lifetime mortgages new business in 2016, which would represent approximately 25% of the market.

The Investment Management business (LGIM) enjoyed £9.6bn of external net inflows and management feels it is "well positioned to handle the uncertain economic and political environment that lies ahead, and continuing fee pressure in asset management markets".

L&G Capital, the unit which invests group cash to improve profits and returns, will invest further capital in housing; infrastructure and SME finance, where it expects there to be attractive returns.

Management intend to switch a larger proportion of assets within both LGR and LGC from traded assets to direct investments, with a medium term target of £15bn.

Broker Shore Capital said operating profits were distorted by one-offs and the interim dividend rebasing, which may obscure a strong underlying performance in respect of cash generation, FuM delivery and resilience of the group’s Solvency II position.

"Increased disclosure on the asset portfolio within direct investments should provide comfort to the nature of the investments which, to us, remain highly appropriate against Legals’ liabilities. The group took a cautious stance in the run-up to Brexit which will deflate cash generation in the short term but, with hindsight, this was an appropriate course of action," said analyst Eamonn Flanagan.

He added that in the run-up to the Brexit vote, L&G held £2.3bn in cash, which will take some time to redeploy and so as a result, for the parts of the business which it set guidance on operating cash, this has reduced to growth of c5% as opposed to the previous steer of 6% to 7%.

Shares in the company were down more than 4% to 208.4p after almost half an hour of trading.