Partnership With Meiji Yasuda Will Expand US PRT Opportunities

Key Takeaways

• Simplifying structure and focused capital allocation are poised to drive sustainable growth in retirement and asset management businesses.
  
• Strategic partnerships and emphasis on Private Markets aim to enhance profitability and expand revenue margins.
  
• Reliance on gilt strategies and increased competition could impact profitability, while interest sensitivity and ambitious private market growth plans present risks to earnings stability.

Catalysts

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

• Legal & General is simplifying its organizational structure to focus on three core businesses: Institutional Retirement, Asset Management, and Retail. This strategic focus aims to drive sustainable growth in areas where the company has a competitive advantage, potentially improving net margins and increasing earnings.
  
• The company is executing a disciplined capital allocation strategy, including disposing of non-core assets and reinvesting proceeds into strategic growth areas like U.S. PRT (Pension Risk Transfer) and Asset Management. This focus on higher-margin and capital-efficient businesses could enhance revenue growth and operational profitability.
  
• Legal & General's partnership with Meiji Yasuda is expected to catalyze growth in the U.S. PRT market and attract third-party capital to Asset Management. This alliance, with Meiji Yasuda committing $1 billion in Private Markets, could significantly boost revenue margins and drive earnings.
  
• The emphasis on Private Markets within Asset Management, focusing on higher-margin products and attracting significant external investments, is poised to increase fee-related revenues, expanding overall revenue and profit margins.
  
• With plans to return over £5 billion to shareholders through dividends and buybacks over the next three years, driven by efficient capital generation and strategic disposals, the company is focusing on enhancing EPS (Earnings Per Share) significantly.

Legal & General Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Legal & General Group's revenue will decrease by 1.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.4% today to 13.3% in 3 years time.
• Analysts expect earnings to reach £1.5 billion (and earnings per share of £0.27) by about May 2028, up from £170.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.6x on those 2028 earnings, down from 80.0x today. This future PE is lower than the current PE for the GB Insurance industry at 12.2x.
• Analysts expect the number of shares outstanding to decline by 1.59% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.4%, as per the Simply Wall St company report.

Legal & General Group Future Earnings Per Share Growth

Risks

• The ongoing reliance on gilt strategies could pose a risk if there is a compression in gilt-swap spreads without a corresponding increase in corporate bond spreads, potentially impacting the company's profitability and ability to maintain a favorable spread level on new business. This could put pressure on revenue and margins.
  
• Increased competition in the bulk annuity market, with new entrants potentially affecting pricing dynamics, might pressure margins and impact future revenues and profitability.
  
• The large proportion of corporate assets under management being sensitive to interest rate changes could continue to affect investment variance negatively, potentially impacting earnings consistency and creating volatility in profit reporting.
  
• Sustained growth in the U.S. Pension Risk Transfer (PRT) business following the disposal of the U.S. protection business may have inherent risks, particularly around capital deployment efficiency and maintaining a stable solvency ratio with evolving economic conditions, which could impact earnings.
  
• The ambitious plans to significantly grow the private markets business could face challenges in attracting third-party capital, especially if market conditions or investor sentiment towards private assets change, impacting the revenue growth targets.

Valuation

• The analysts have a consensus price target of £2.622 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 £2.15.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £11.4 billion, earnings will come to £1.5 billion, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 6.4%.
• Given the current share price of £2.34, the analyst price target of £2.62 is 10.6% higher.
• 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.