Group plc () reported an increase in first-half profits as a slowdown in the long-term trend of improvements in life expectancy boosted its retirement business.

However, shares fell 2.12% to 262.90p in late morning trading as some analysts said the benefit of people dying quicker than expected had flattered the results. 

In the six months to 30 June, pre-tax profit rose 41% to £1.2bn from a year ago on the back of a 27% increase in operating profit to £988mln. The group made a net profit of £17mln on its disposal of its Netherlands business in April.

Its Retirement division delivered a 40% increase in operating profit to £566mln, as a higher-than-expected number of deaths meant it had less money to pay out to retirees, leading to a base mortality release of £126mln. 

reiterated a ‘sell’ rating, saying one-off items, including the mortality release, “skew visibility” on the company.

The company said the demand for pension de-risking remains strong and has been quoting about £12bn of buy-in and buy-out deals in the UK.

During the period, it completed £1.7bn of bulk annuity transactions, compared to £695mln the same period a year ago. 

Growth in fee revenue and assets under management 

The investment management arm LGIM saw a 13% increase in operating profit to £194mln, supported by a 15% increase in management fee revenue to £382mln and a rise in net inflows to £21.7bn from £9.6bn. Asset under management at LGIM climbed 13% to £951bn.

In Capital, the early-state investment business focused on housing, infrastructure and small and medium enterprises finances, growth in the size of the equity portfolio and robust performance in investments helped operating profit edge up 5% to £142mln.  

Operating profit in the investment products division was flat, as an increase in US income protection was offset by a decrease in UK income protection.

The group raised its dividend by 7.5% to 4.30 per share.

L&G boosts capital buffers 

Legal & General improved its capital position, recognising the economic uncertainties surrounding the possible impact of Brexit. Solvency II surplus increased to £6.7bn from £5.7bn and the Solvency II coverage ratio rose to 186% from 171%.

“We are not being complacent as we recognise that there are currently some structural weaknesses in the UK economy,” said chief executive Nigel Wilson.

“Notwithstanding this we have tremendous momentum across our business, a strong AA- rated balance sheet and increasing access to global growth opportunities, therefore we remain confident in our ability to deliver growth.”

L&G addresses FCA asset management study and Brexit negotiations

Turning to the second half, the company expects to see “positive growth” individual annuity sales, boosted by its distribution agreement with Aegon.

For fiscal year 2017, the group expects a 10% increase in gross premiums in general insurance and is on track to meet its sales proceeds target of £250mln from asset disposals in the Legal & General Capital business.

It also antcipates continued growth in US new business sales in investment products and said LGIM is well positioned to deal with the challenges facing the industry, including the Financial Conduct Authority’s (FCA) asset management study and Brexit negotiations.

The FCA in June said in its study that the £7tn asset management industry must introduce sweeping reforms to cut costs and improve returns for savers.

What analysts think

“All in all, these are a really encouraging set of numbers. L&G is performing strongly and if there are further reserve releases ahead, the group’s capital position can only get stronger,” said Steve Clayton, analyst.

“The shares have been hitting new all-time highs in recent sessions, a sign that the market is clearly warming to the L&G story.”

Shore Capital repeated a ‘buy’ rating and target price of 276p,  highlighting a “strong set of results” and an upbeat outlook. 

The broker said the company’s strategy remains consistent, namely its focus on ageing populations, globalisation of asset markets, welfare reform, creating assets, digital and “providing today’s capital”.

“In the bulk annuity space its strategy is multi-pronged: ‘capital-lite’ in the UK; exploring the Continental European market (such as the Netherlands) where pricing is much more attractive than in the UK and in the US,” said ShoreCap’s Eamonn Flanagan. 

“All this supports further growth in the cash-generation from the group…and hence dividend growth.”

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