I've covered L&G for 10 years, I'm impressed at the coverage of the issues. There are a number of potential tailwinds which don't receive a lot of attention. LGIM's cost income ratio has been rising for some years and I think is close to peaking, this should mean that revenue growth coverts to EBIT growth which has lagged for some time. Longevity reserve releases should also be a natural tailwind in the years ahead as their reserving follows mortality tables which reflect pre-pandemic trends. Over the next 2-3 years this should act as some support to the LGRI earnings. At a more basic level, I think the key to this business is that people value it as a short duration business, yet it is writing policies which will release profits and capital for 15-30 years with zero lapse risk. With no lapse risk, they are uniquely positioned to capture illiquidity premium that banks and asset managers cannot - as they must provide their investors liquidity. Feel free to ask me anything.
(1) Aviva, PIC, Rothesay, Phoenix, Scottish Widows all write bulk annuities. PIC I think is the closest competitor and is less than half the size. I think LGEN has two distinct advantages in scale and investment capability (origination and warehousing of assets via LGC). Knowing you’ve an eligible asset with a yield pickup is an advantage in pricing BPA deals. That said, I think it is a very competitive market and my view is the tailwind is so strong it is supply side constrained. (2) Capital position is as strong as it has ever been and in summary I would agree with your take on how IFRS 17 will be viewed over time (the CSM). (3) this was a genuine surprise. I thought Laura Mason or Kerrigan Procter were obvious internal candidates who have been rotating around the main businesses for years. I have met Kerrigan several times and think he was very capable and I confess when I read the announcement I worried LGEN might suffer some senior management churn. I’ve also met the new CEO when he was a lieutenant at HSBC - I was neither impressed/unimpressed so I’m really in wait and see mode… sorry can’t be more helpful on that point. One thing I would say in general is that I’ve always been more impressed with LGEN second tier management than Aviva and it had had experienced much less management churn (Aviva had been a joke) - this in my view is because LGEN is a much more coherent business having disposed of lots of sub scale adjacent businesses. Aviva still has wood to chop.
Competition its not just the competitors you mentioned companies regularly consider longevity swaps and other derivatives offered by companies like pacific life etc
I don't necessarily think capital requirements are that big of a barrier
A cleaner way to get exposure to this theme in my opinion could be consultants that specialise in pension risk transfer on top of my head, AON,Hymans,Willis towers , Barnet not sure which are private. But the chat is roughly that this area of business is expected to grow and has been quite profitable for the consultants
2. Good point of ifrs17 had not considered that investors would still feel this is new having worked on ifrs17 implementation over the past 2 years.
3. Another potential source for insurance companies in general is the potentially loosening of rules by pra due to brexit which could give more Liberal matching adjustment requirements enabling L&G to capture more of that illquidity premium and have lower capital requirements. Its a double edged sword though if not done properly
Just some points from a actuary with prt and ifrs17 experience.
Personally don't feel investors are ready for the separation of finance and insurance components differences on ifrs17 but they may not care either .
I've covered L&G for 10 years, I'm impressed at the coverage of the issues. There are a number of potential tailwinds which don't receive a lot of attention. LGIM's cost income ratio has been rising for some years and I think is close to peaking, this should mean that revenue growth coverts to EBIT growth which has lagged for some time. Longevity reserve releases should also be a natural tailwind in the years ahead as their reserving follows mortality tables which reflect pre-pandemic trends. Over the next 2-3 years this should act as some support to the LGRI earnings. At a more basic level, I think the key to this business is that people value it as a short duration business, yet it is writing policies which will release profits and capital for 15-30 years with zero lapse risk. With no lapse risk, they are uniquely positioned to capture illiquidity premium that banks and asset managers cannot - as they must provide their investors liquidity. Feel free to ask me anything.
Thanks for your reply Mike. Happy to bite on your offer and see if you have thoughts on:
(1) Competition, i.e.more colour on how they do versus comp (Aviva, Pension Insurance Co).
(2) Capital position: I was not concerned at the reduced IFRS equity, but would appreciate thoughts.
(3) CEO transformation process.
(1) Aviva, PIC, Rothesay, Phoenix, Scottish Widows all write bulk annuities. PIC I think is the closest competitor and is less than half the size. I think LGEN has two distinct advantages in scale and investment capability (origination and warehousing of assets via LGC). Knowing you’ve an eligible asset with a yield pickup is an advantage in pricing BPA deals. That said, I think it is a very competitive market and my view is the tailwind is so strong it is supply side constrained. (2) Capital position is as strong as it has ever been and in summary I would agree with your take on how IFRS 17 will be viewed over time (the CSM). (3) this was a genuine surprise. I thought Laura Mason or Kerrigan Procter were obvious internal candidates who have been rotating around the main businesses for years. I have met Kerrigan several times and think he was very capable and I confess when I read the announcement I worried LGEN might suffer some senior management churn. I’ve also met the new CEO when he was a lieutenant at HSBC - I was neither impressed/unimpressed so I’m really in wait and see mode… sorry can’t be more helpful on that point. One thing I would say in general is that I’ve always been more impressed with LGEN second tier management than Aviva and it had had experienced much less management churn (Aviva had been a joke) - this in my view is because LGEN is a much more coherent business having disposed of lots of sub scale adjacent businesses. Aviva still has wood to chop.
This is in my wheelhouse so couple points
Competition its not just the competitors you mentioned companies regularly consider longevity swaps and other derivatives offered by companies like pacific life etc
I don't necessarily think capital requirements are that big of a barrier
A cleaner way to get exposure to this theme in my opinion could be consultants that specialise in pension risk transfer on top of my head, AON,Hymans,Willis towers , Barnet not sure which are private. But the chat is roughly that this area of business is expected to grow and has been quite profitable for the consultants
2. Good point of ifrs17 had not considered that investors would still feel this is new having worked on ifrs17 implementation over the past 2 years.
3. Another potential source for insurance companies in general is the potentially loosening of rules by pra due to brexit which could give more Liberal matching adjustment requirements enabling L&G to capture more of that illquidity premium and have lower capital requirements. Its a double edged sword though if not done properly
Just some points from a actuary with prt and ifrs17 experience.
Personally don't feel investors are ready for the separation of finance and insurance components differences on ifrs17 but they may not care either .
I did like reading your thesis
I've become recently interested in the company... thanks for sharing.
This is a great writeup (also because I have a position in them – hence feeding my confirmation bias nicely:). I like them because they are super cheap and pay a hefty dividend while you wait – 8.5% or so. Another aspect is that they may be helped by changes in the Solvency regime in the UK - https://www.pwc.co.uk/industries/financial-services/understanding-regulatory-developments/uk-government-overhauls-solvency-ii-.html
Thanks for commenting Guy. I would have thought the lowest return environment, at least in terms of fixed income, may be behind us. But who knows...