Legal & General Stock: 2021 Full Year Review (OTCMKTS:LGGNF)

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L&G logo

L&G logo (Legal & General )

Investment thesis

In my last article on Legal & General Group Plc (OTCPK:LGGNF) of 27 October last year, I concluded that despite its 50% rise in share price since I started covering this stock, it still had the potential for further appreciation.

That has not happened yet.

It is down 7% since the 27th of October last year, against a backdrop of the S&P 500 (SPY) being down just 1%

Now that LGGNF has published their full-year results, we revisit the thesis to see if it is a buy as I had earlier indicated, or if we need to reassess the investment.

2021 FY Financial Results

Mid-year of 2021, the management said that they expected to deliver double-digit growth in operating profit for 2021 full-year results. Now that they have published results for the full year, we are pleased to learn that it was in line with their prediction as LGGNF’s operating profits in 2021 were up by 11% compared with the year before. The group recorded GBP 2.6 billion in profit before taxes.

EPS which came in at GB pence 34.36 was 72% higher than last year.

Since 2020 was not a good year to compare against as a result of COVID-19, it is quite impressive that it was still 19% higher than what it was in 2019.

L&G - 10 year performance

L&G – 10 year performance (L&G 2021 FY Results)

I do know that past performance is not a guarantee of future performance, but their 10-year track record is quite impressive, in my opinion.

Their Solvency II coverage ratio was 187% at the year-end and is at the time of writing this even higher at 198%.

Their dividend growth is excellent. Furthermore, they have a board that intends to maintain a progressive dividend policy. Knowing that their cash generation is larger than their earnings per share, means that their dividend is well covered and there is room for a gradual increase going forward.

As I pointed out in my earlier article, LGGNF has four main business lines, and we shall look at how each of these divisions performed over the last year.

LGC = Legal & General Capital Division

This division uses some of their customer’s pension assets, as well as the group’s shareholder capital, to make long-term investments in assets such as future cities, infrastructure, housing, and SME finance.

One such example is CALA Homes.

Cala Homes

Cala Homes (Cala Homes)

In March of 2018, LGGNF purchased 51% of the shares they did not already own, and it became a fully owned subsidiary. It is one of the 10 largest home builders in the UK. In 2021 they built and delivered 2,904 homes with an average sales price of GBP 462,000 per home.

Their 5-year plan is to be able to develop 4,000 homes a year and to generate GBP 1.7 billion in revenue with an operating profit of about GBP 270 million per year. In the UK there is a chronic supply shortage of homes. It is a sector that has been under-invested in for many years. As a result, there are about 1.2 million people on the housing waiting list.

There are plenty of obvious synergies between this homebuilding unit and within the investments the group makes. One such example is the “Build to Rent” scheme they operate. Instead of selling the homes, some of them are rented out to retirees. This gives them long-term rental income for their Retirement Division and for their Investment Management division. It currently has a portfolio valued at GBP 2.6 billion with over 7,000 UK-wide homes in operation or development stages.

In 2021, they did a 15-year joint venture partnership with NatWest Group’s (NWG) Pension Fund, aiming to expand such retirement home villages with up to 34 villages supporting around 8,000 residents.

The division ended 2021 with total direct investments valued at GBP 3.4 billion and generated adjusted operating profits of GBP 461 million. This was a big increase from the GBP 275 million they achieved in 2020.

LGI = Legal & General Insurance Division

The retail part provides a guaranteed retirement income for its retail customers, mostly in the UK and the USA. They are looking at growing this in new markets such as in Asia.

Their focus is life insurance and they are the largest in that segment in the UK with more than 9 million clients.

Gross written premiums in 2021 delivered growth of 2% to GBP 2.9 billion. From this, they paid out GBP 2.1 billion of protection claims during the year. Out of this, GBP 279 million was related to COVID-19 claims.

What we see in the banking sector with increased transformation through digitization is also occurring in the insurance sector. LGGNY has invested heavily in digital fintech solutions.

The division contributed with an adjusted operating profit of GBP 268 million, up from GBP 189 million the year before.

LGIM = Legal & General Investment Management Division

The company is one of Europe’s largest asset managers with assets under its management of GBP 1.421 trillion, which was up from GBP 1.279 trillion at the end of 2020.

As global assets under management are projected to increase from $103 trillion in 2020 to $136 trillion by 2025, it is safe to assume that the biggest asset managers such as LGGNY will get even bigger, whilst the smaller ones will get even smaller.

Some media outlets pointed out that LGGNY had exposure to Russian Dollar bonds valued at about USD 272 million which had by 25 February fallen by 50%. Even if it goes to zero, and they have to make a one-time impairment charge for it, this will not be a big problem for LGGNY.

The division contributed with an adjusted operating profit of GBP 422 million, up from GBP 407 million the year before.

LGRI = Legal & General Retirement Division.

It used to be divided into Institutional and Retail. However, as of 1st January 2022, the retail arm of the division has been transferred to the Insurance division.

What is left is the larger Institutional division. In size, it is by far the largest. It contributed more than double the operating profit of any other division in the group.

However, the premiums they collected in 2021 are on a negative trend to the two preceding years.

LGRI - Declining trend in policies

LGRI – Declining trend in policies (L&G 2021 FY results. Graph by author)

The year 2019 was their record year. In that year, they concluded two large transactions, which certainly helped bump up the number. They did a partial buyout with Rolls-Royce Pension Fund valued at more than GBP £4.6 billion covering 33,000 pensioners, and also a GBP 1 billion buyout for Vickers Group Pension scheme.

In 2021 the number of deals was larger, but it was more in the small to medium size companies. As much as 72% of UK pension schemes have assets of less than GBP 100 million. In that segment, LGGNF completed 31 transactions which were below GBP £100 million each, totaling £900 million in premiums.

LGNY does anticipate strong demand from institutions that want to transfer and de-risk their defined benefit pension portfolios. They remain confident that they will be able to achieve writing GBP 40 billion to GBP 50 billion in premium in the UK and $10 billion of International premiums over a five-year period.

Operating profit for the institutional division was slightly lower in 2021 at GBP 1,154 million as compared to GBP 1,229 million the year before.

Business development

Management of LGGNF has communicated for some time that they have ambitions of growth in the Asia Pacific region. This potential growth needs to be targeted at certain niche markets, as it is very competitive and well served in large mature economies in Asia.

L&G - Expansion in Asia Pacific

L&G – Expansion in Asia Pacific (L&G – 2021 Financial Results Presentation)

This competitive landscape is not lost on LGGNF. They know where they can, or cannot, gain market share. Countries they are looking to grow in is Australia in terms of life insurance and retirement plans. In terms of investments, they will expand throughout the Asia Pacific region.

Comparing apples with apples?

Management produced three slides in their last presentation where they are measuring themselves up against BlackRock (BLK), Blackstone (BX) and Brookfield (BAM).

Is that a fair comparison?

BlackRock

Apart from the obvious difference in the size of the market capitalization of USD 111 billion versus LGGNF’s USD 21 billion, I would label BLK more as a pure asset manager, so it is not quite similar.

Blackstone

This company started off, not that long ago, as a mergers and acquisitions advisory boutique that morphed into a private equity manager. From 1985 to now they have surely become very successful, but I would argue that their culture and businesses are also not that similar to LGGNF.

Brookfield

Brookfield, of Canada, is perhaps the best comparison. It, like LGGNF, was founded more than 100 years ago, and whilst LGGNF started as a pure insurance company, BAM was an investor in infrastructure. Lately, they are more known around the world for their large real estate investments. The market capitalization is USD 87 billion.

As such, we will focus only on comparing LGGNF with BAM.

Comparison L&G versus Brookfield Asset Management

Comparison L&G versus Brookfield Asset Management (L&G – 2021 FY Financial Results Presentation)

It is clear that LGGNF’s share is priced more attractively. I do think that is because valuations on most stocks in the U.S. are largely priced at higher valuations than what we see on the London Stock Exchange.

With regards to the claim of achieving an ROE as high as 20%, it piqued my interest because this is unusually high in the finance industry.

LGGNF’s management state that due to the synergistic nature of their business they are able to deliver this high ROE.

However, during the Q&A session of their presentation to analysts, one analyst pointed out that the 20% ROE is on the basis of using IFRS accounting rules. If they were doing it purely on their own funds, he said their return was more like 10% to 12%.

That is more in line with the industry norm.

Conclusion

Legal & General’s strong position and ability to synergize within the group should enable it to continue to grow operating profits and cash flow generation going forward.

With its proven shareholder-friendly capital allocation, I continue to view the company as a buy.

To prove that, I put my money where my mouth is.

I have added shares on dips in the price as seen over the last couple of months and will continue to do so.

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