UK Demographic Shifts And Digital Transformation Will Unlock Value

Key Takeaways

• Ageing populations and pension system growth are driving predictable demand for retirement solutions and ongoing increases in assets under management.
  
• Strategic focus on alternatives, ESG, and digital transformation is improving revenue mix, margins, and Legal & General's long-term growth prospects.
  
• Intensifying competition, regulatory pressures, and reliance on demographic trends and alternative investments increase risks to growth, margins, and earnings stability.

Catalysts

Provides various insurance products and services in the United Kingdom, the United States, and internationally.

• Ongoing demographic shifts, especially ageing populations in the UK and developed markets, continue to drive strong structural demand for Legal & General's retirement solutions and bulk annuities; with a robust £42bn pipeline and projected market growth beyond 2028, this underpins predictable, long-term growth in revenue and core operating profits.
  
• The accelerating growth of defined contribution pension systems and workplace pension assets is expanding the addressable market for both retail and institutional asset management, as demonstrated by 21% net flow growth in workplace DC, positioning the company for sustained AUM increases and higher recurring fee income.
  
• Strategic build-out in alternative assets, infrastructure, and private markets-including new launches and partnerships with firms like Blackstone-enables Legal & General to improve its revenue mix and fee margins, supporting both earnings visibility and margin expansion over time.
  
• Growing emphasis on sustainable investment solutions (ESG) and Legal & General's early moves (such as connecting to the UK pension dashboard and ESG product launches) are positioning them to attract additional inflows, particularly as regulatory and client focus on ESG tightens, positively impacting net flows and long-term AUM growth.
  
• Digital transformation and operational streamlining (e.g., automation, disposal of US operations, ongoing cost discipline) are expected to further reduce cost-to-income ratios below 70% by 2028, directly contributing to improved net margins and operational leverage.

Legal & General Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Legal & General Group's revenue will decrease by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.1% today to 13.3% in 3 years time.
• Analysts expect earnings to reach £1.4 billion (and earnings per share of £0.27) by about August 2028, up from £259.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as £1.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.8x on those 2028 earnings, down from 56.5x today. This future PE is lower than the current PE for the GB Insurance industry at 14.8x.
• Analysts expect the number of shares outstanding to decline by 2.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

Legal & General Group Future Earnings Per Share Growth

Risks

• Heightened competition in both the UK and US bulk annuity (PRT) markets from new and established entrants, including private market players and asset managers with significant origination capabilities, could compress margins or limit Legal & General's market share, putting sustained pressure on revenue growth and net earnings.
  
• Sustained periods of low or less-volatile interest rates, or structural challenges in generating sufficient yield uplift through back book optimization and asset trading, could reduce the capacity for management actions to contribute incremental profits, potentially limiting future improvements in net margins and constraining growth in surplus capital available for shareholder returns.
  
• The company's ongoing pivot to a more capital-light, asset-management-led model is heavily reliant on the continued expansion and successful execution in higher-margin, private markets and alternative investment strategies; failure to attract sufficient third-party AUM, or execution risks and underperformance in these areas, could result in lower-than-expected fee income growth and reduced earnings visibility.
  
• Increasing regulatory scrutiny and evolving capital requirements (under frameworks like Solvency II and IFRS 17), along with greater requirements for transparency and mark-to-market accounting on investments, may increase compliance costs and introduce volatility in reported profits and shareholder equity, potentially weighing on reported returns and capital flexibility.
  
• A significant portion of Legal & General's growth assumptions are anchored to UK and global demographic trends, especially the ongoing growth in defined contribution (DC) pension assets and demand for retirement products; any unexpected shifts in demographics, economic downturns impacting contributions, or market-wide reductions in DB scheme de-risking activity could lower new business volumes and slow long-term revenue and profit growth.

Valuation

• The analysts have a consensus price target of £2.619 for Legal & General Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £3.35, and the most bearish reporting a price target of just £2.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £10.7 billion, earnings will come to £1.4 billion, and it would be trading on a PE ratio of 11.8x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of £2.59, the analyst price target of £2.62 is 1.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.