Sell into strength as concerns remain

UNCERTAINTY has haunted Legal & General (L&G) for the past year, and yesterday’s interim update did little to change this. Shares in the UK’s fifth-biggest life assurer, long touted as a takeover target, closed at 76.35p, over three times its all-time low of 21p last year when it cut its dividend for the first time in its history. On the surface, its prudence has paid off. Cost-cutting and its focus on bolstering its capital base have generated £650m, compared to £342m in 2008, well ahead of its £450m target. Its cash surplus is now £3.1bn, up from £1.9bn at the end of 2008. It now clearly has the cash to increase its dividend this March. But fears remain over how sustainable L&G’s growth is. Worldwide new business was £1.39bn, lower than 2008’s £1.49bn, while premium income within the UK Life & Pensions business, 68 per cent of operating profit, came under pressure. Individual protection new business fell 12 per cent year-on-year due to a subdued housing market and group protection new business fell 15 per cent due to pressure on corporate payrolls – both issues which will continue.

Meanwhile, the investment management division took £31.5bn of new funds – a one per cent rise.

But rival products and fund managers are increasingly encroaching on L&G’s passive patch. Fears also remain over the pending overhaul of European solvency rules for insurers, due in 2012, which could mean an increase in L&G’s capital requirements. Together with a low-growth UK market and fears over its exposure to risky assets such as corporate bonds, Killik & Co’s advice to sell into share strength is wise.