Legal & General Group Plc - Strong competitive positioning in growing and profitable market.

Legal & General Group PLC (LON: LGEN) is a FTSE 100 listed Company, which provides financial services across the UK, and the US.

On 10 March 2021, the Company will announce the 2020 full-year results.

Rationale for Valuation – Buy at GBX 182.15

• Over the next five years, the Group intends to write £40 to £50 billion of UK pension de-risking business.
• In September 2020, Fitch Ratings affirmed “AA-” Long-term credit rating, which supports the future growth potential.
• In the last six months, the Company has delivered a sparkling return of ~31.86%, which was higher as compared to the FTSE 100 Index.
• It has maintained an investment ratio above 200% for the last five years, which also underpinned by continuous growth in the UK and overseas business.
• From the technical standpoint, 90-day RSI stood at 40.46, which is supporting the upside movement.

Key Risks

• The ongoing market volatility arising from geopolitical and economic uncertainties can dampen investor sentiments.
• The Company operates in a regulatory environment; any change in regulations or government policies could affect the overall business of the Company.
• In the first half of 2020, the profit was down, due to the unrealised impact of market movements and the formulaic impact of lower interest rates on LGI (Legal & General Insurance).

Recent News

On 17 August 2020, the Company stated that Legal & General Investment Management (LGIM) division had launched a double tech project, which will boost members’ engagement.

Financial Highlights (for the six months period to 30 June 2020, as on 5 August 2020)

(Source: Company Website)

• LGEN delivered a strong balance sheet, and resilient operating profits, with H1 FY20 solvency II coverage ratio of 173% and unutilised credit default reserve of £3.5 billion.
• For H1 FY20, the operating profit from continuing division decreased to £1,128 million (H1 FY19: £1,154 million), with 3 of 5 businesses delivering growth.
• Led by the consistent performance of the growing annuity portfolio, the LGR (Legal & General Retirement) operating profit increased by 10% year-on-year to £721 million.
• The Board declared an interim dividend per share of 4.93 pence, in line with the previous year.
• The Company believes that the business is well placed to pursue upcoming opportunities in H2 FY20, supported by strong competitive positioning in growing and profitable markets.

One Year Share Price Chart

Daily Chart as of 21 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Book Value Approach (NTM) (Illustrative)

Conclusion

It expects LGRR (Legal & General Retirement Retail) target market to continue to expand, due to welfare reforms and ageing demographics. LGIM (Legal & General Investment Management) is well-positioned to continue to drive net flows and to deliver earnings growth, as it continues to expand internationally. Further, LGI (Legal & General Insurance) expects to emerge stronger from the current COVID-19 crisis. The Company remain committed to delivering Inclusive Capitalism and intend to be a leader in the post-pandemic economic recovery, supporting the society, shareholders, and customers. Over the longer-term, the Company plans to operate with a robust balance sheet, resilient operating profits, and highly relevant products and services. The stock made a 52-week low and high of GBX 138.00 and GBX 324.70, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Legal & General Group at the current market price of GBX 182.15 (as on 21 September 2020, before the market close at 8:45 AM GMT+1), with lower double-digit upside potential based on 1.25x Price/NTM Book Value (approx.) on FY20E book value per share (approx.).

RSA Insurance Group Plc – Operating with strong balance sheet and capital management

RSA Insurance Group Plc (LON: RSA) is a General Insurance Company, which is listed on the FTSE 100 index.

Rationale for Valuation – Hold at GBX 464.20

• The loss ratio and expense ratio recorded by the Company in the past three years was considerably below the industry median.
• In the last six months, the Company has delivered a stellar return of ~42.06%, which was higher as compared to the FTSE 100 Index.
• Fitch affirmed “A-” Long-term credit rating in May 2020, with a stable outlook on RSA.
• From the technical standpoint, 90-day RSI stood at 44.96, which is supporting the upside movement.

Key Risks

• The falling equity markets and interests' rates could put pressure on the insurers' balance sheets, life product profitability and investment management fees in short-term.
• The Covid-19 pandemic and wider economic downturn have been impacting the portfolio value of assets.

Recent News

On 15 September 2020, the UK’s financial services regulator stated that a court has ruled in favour of policyholders in a business interruption claims test case against insurers. RSA was one of 8 insurers directly involved in the court hearings. The Company estimates the impact of this judgment to be approximately £85 million (after the application of the catastrophe reinsurance protection).

Financial Highlights (for the six months ended 30 June 2020, as on 30 July 2020)

(Source: Company Website)

• RSA has reported a strong first half 2020 performance, with net written premiums of £3,135 million. The Combined operating ratio was 92.2% that measures the underwriting performance.
• The COVID-19 impact on the net written premium is expected to be close to £110 million in H1 FY20.
• The Solvency II surplus excluding dividend was £1.3 billion with a Surplus II coverage ratio of 172%.

One Year Share Price Chart

Daily Chart as of 21 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Book Value Approach (NTM) (Illustrative)

Conclusion

The Company wishes to create value for customers through a quick process of claims and cater to shareholders via increased shareholder return. RSA intends to resume dividend as soon as the situation is back to normal and aims to cover up for the missed dividend payment. Despite the COVID-19 impacts, the firm has reported good growth in underwriting profits in H1 FY20. Overall, it is expecting to see some recovery in the near term. The stock made a 52-week low and high of GBX 321.20 and GBX 736.84, respectively.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance on RSA Insurance Group at the current price of GBX 464.20 (as on 21 September 2020, before the market close at 11:30 AM GMT+1) and will recommend fresh buying at the right time.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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