L&G: economic shortfalls provide investment opportunities

Britain is not doing awfully well. That is the message from Legal & General’s quarterly “Rebuilding Britain” index. The report makes for depressing reading. But the UK-focused insurer may be able to buck the wider trend. 

The survey, which is based on questions put to 20,000 households, shows inflation starting to bite, as suggested by February’s shock 10.4 per cent increase. Salaries are failing to keep up, with 95 per cent of households experiencing a decline in real incomes.

Satisfaction with critical infrastructure — housing in particular — is down nationally. Respondents do not feel local housing meets local needs, particularly for cheaper “starter” homes. The market is unlikely to deliver them at speed given unaffordable mortgages and increasingly risk-averse banks.

L&G’s stock has fallen in sympathy with Britain’s woes. It is down 10 per cent over the past month and 14 per cent over the past year. 

That chimes with the insurer’s exposure to the UK, which over the next couple of years will provide some 80 per cent of operating profits, according to Panmure Gordon’s Abid Hussain. A spluttering economy raises concerns over credit quality across L&G’s huge bond portfolio. L&G’s £9.4bn real estate portfolio, of which £4bn are offices, might also be affected by a slowdown, despite the group’s focus on good quality tenants.

Yet L&G also has a couple of potential offsets up its sleeve. High interest rates benefit insurers generally. The value of their liabilities — which generally come due in the distant future — falls, often more than their assets. 

This may spur further growth at L&G’s biggest division, which specialises in taking the old, so-called defined benefits schemes off the hands of the original corporates at a price. Such schemes become better funded when rates rise, meaning more companies are likely to offload theirs.

L&G is also in the business of building new properties from scratch, generating assets to match its liabilities. So far, its Capital division has a £4.2bn portfolio of direct investments. It aims to get that to £5bn by 2025. The government’s desire to encourage investment in the UK’s struggling “levelling up” agenda may open up strategic opportunities for this division.

That’s not to underplay the grim economy’s challenges — for the UK and L&G itself. But on seven times this year’s earnings, the insurer looks well protected.