UK Aging And Fintech Rivalry Will Erode Profitability

Key Takeaways

• Slowing demographic growth, market overexposure, and heightened regulation threaten Legal & General's long-term earnings, margins, and ability to sustain dividends.
  
• Rising competition and disruptive technologies risk margin contraction and revenue stagnation as innovative challengers erode the company's pricing power and market share.
  
• Structural demographic trends and diversification into asset management are driving Legal & General's growth, with operational discipline and strong capital position supporting long-term shareholder value.

Catalysts

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

• The long-term growth engine of Legal & General-persistent expansion in the pension risk transfer and retirement solutions markets-faces the threat of a plateauing aging population, which could slow annuity and retirement product revenue growth materially and shrink the future earnings pool. With company projections heavily reliant on multi-decade demand, a moderation in demographic tailwinds could lead to years of disappointing revenue and EPS outcomes.
  
• Sustained low or volatile interest rates threaten Legal & General's ability to generate attractive yields on large annuity and pension liabilities, placing persistent downward pressure on net investment margins and operating profit, especially as core earnings and buyback capacity are closely linked to investment returns.
  
• Overdependence on the UK market, combined with slow progress in overseas diversification, means that any regulatory tightening, political or macroeconomic disruption, or local capital standard increases would have an outsized negative effect on revenues, net margins, and group earnings, amplifying the downside from isolated local shocks.
  
• Mounting competition from fintechs, new asset managers, and private players in both asset management and pension de-risking structurally compresses fee income and pricing power, while Legal & General's ongoing investments in digital and product innovation risk lagging sector disruptors-setting up for margin erosion and stalled top-line growth as market share slips.
  
• Increasing regulatory focus on climate and ESG risk may drive up compliance costs and impose stricter limits on eligible investment portfolios, elevating Legal & General's expense base, limiting asset return opportunities, and ultimately squeezing both net margins and long-term profitability, just as the company faces pressures to maintain dividend and buyback promises.

Legal & General Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Legal & General Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Legal & General Group's revenue will decrease by 4.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.1% today to 14.8% in 3 years time.
• The bearish analysts expect earnings to reach £1.6 billion (and earnings per share of £0.29) by about August 2028, up from £259.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 8.3x on those 2028 earnings, down from 56.8x today. This future PE is lower than the current PE for the GB Insurance industry at 13.2x.
• Analysts expect the number of shares outstanding to decline by 0.65% 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

• The secular trend of an aging population in the UK and globally is fueling persistent and increasing demand for retirement solutions and annuities, which is already translating into robust volumes and a growing pipeline for Legal & General's pension risk transfer business, supporting future revenue and earnings growth.
  
• Legal & General's strategic expansion into higher-margin, fee-based asset management-including the rapid growth of private markets and international asset management-strengthens and diversifies future revenue streams and enhances operating margins as scale increases.
  
• Industry-wide momentum towards pension risk transfer solutions is expected to remain strong for decades, with Legal & General maintaining competitive advantages through scale, asset origination capabilities, and integrated asset management, creating recurring and growing earnings power over the long term.
  
• Discipline in cost management, ongoing investment in digitalisation, and operational improvements are resulting in consistent underlying cost control, positioning the company for expanding net margins and improved cost-income ratios as it scales.
  
• A strong balance sheet, high Solvency II coverage, and capacity for significant shareholder returns through growing dividends and share buybacks indicate management confidence in sustainable capital generation and core profit growth, underpinning long-term shareholder value and potential support for share price.

Valuation

• The assumed bearish price target for Legal & General Group is £2.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Legal & General Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• 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 bearish analysts, you'd need to believe that by 2028, revenues will be £10.9 billion, earnings will come to £1.6 billion, and it would be trading on a PE ratio of 8.3x, assuming you use a discount rate of 6.8%.
• Given the current share price of £2.61, the bearish analyst price target of £2.0 is 30.3% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.