Legal & General: A 9% Yielding Stock Poised for 20% Annual Returns
A Rare Combination of a 9% Yield and Double-Digit Growth Prospects
This article continues my series about British life insurer Legal & General (LGGNY) (LGGNF) (LGEN in London) and I will skip a detailed description available in my previous articles (please check my archive) with the latest here.
The current update addresses the 2024 results recently released by the company, explains accounting, and conservatively evaluates expected returns.
LGEN is reviewed less frequently in the U.S. compared to other high-yielders, such as MLPs, and this is no coincidence. First, it is not a U.S.-listed company and trades in GBP, which may deter some investors. Additionally, some may overlook the fact that the UK does not impose a withholding tax, and LGEN’s dividends are “qualified” for U.S. tax purposes.
Secondly, life insurers are generally difficult to understand because of their arcane accounting. This applies to all life insurers, but the challenge is even greater for European insurers due to the coexistence of two equally important accounting regimes - IFRS (for financial reporting) and Solvency II (for regulatory purposes) - as well as the recent introduction of IFRS 17. Questions from my readers confirm the difficulties this presents for U.S. investors.
IFRS 17, in my opinion, complicates analyzing P&C insurers but may make life insurers easier to value.
Valuing LGEN
LGEN consists of two life insurance segments (Institutional Retirement and Retail) and the Asset Management ("AM") segment. Since it is primarily an insurance company, let us value it as such.
The value of a life insurer consists of two parts. The first is its book value. The second is the present value of future insurance-related cash flows.
Every new policy issued by a life insurer initiates future cash flows. They consist of inflows such as premiums and cash outflows such as customer payouts/claims and expenses attributable to this particular policy. Accounting begins with estimating these future cash flows and discounting them to the present value. Since every insurer strives to generate a profit, it prices policies to make this present value positive on average.
Under IFRS 17, this future profit is released into income gradually over the life of the