L&G: Economic shortages provide opportunities for investment

Britain is not doing well. This is it message From Legal & General’s quarterly ‘Rebuilding Britain’ index. The report makes for a frustrating read. But the UK-focused insurer may be able to reverse the broader trend.

The survey, which is based on questions asked to 20,000 households, showed that inflation is beginning to take its toll, as indicated by the February shock, with an increase of 10.4 percent. Salaries have failed to keep pace, with 95 percent of households experiencing a decline in real income.

Satisfaction with critical infrastructure – housing in particular – has fallen nationwide. Respondents do not feel that local housing meets local needs, especially for cheaper ‘starter’ homes. The market is unlikely to deliver as quickly given the unaffordable mortgages and the increasingly risk-averse banks.

L & GJapan’s stocks fell in sympathy with Britain’s woes. It’s down 10 percent over the past month and 14 percent over last year.

This is consistent with the insurer’s exposure to the UK, which over the next two years will provide about 80 percent of its operating profit, according to Abid Hussain of Panmure. The ailing economy raises concerns about credit quality across L&G’s huge bond portfolio. L&G’s £9.4bn real estate portfolio, of which £4bn is offices, could be affected by the slowdown, despite the group’s focus on good quality tenants .

However, L&G also has some potential compensation up its sleeve. Higher interest rates generally benefit insurance companies. The value of their liabilities—which generally come due in the distant future—goes down, often more than their assets.

That could spur further growth in L&G’s largest division, which specializes in getting legacy so-called defined benefit plans out of the hands of the original companies at a price. Such schemes become better funded when prices go up, which means more companies are likely to offload their businesses.

L&G also builds new properties from scratch, generating assets to match its liabilities. To date, its venture capital division has a direct investment portfolio of £4.2 billion. It aims to increase this to £5 billion by 2025. The government’s willingness to encourage investment in the UK’s flagging ‘upgrade’ agenda could open up strategic opportunities for the department.

This is not to underestimate the economy’s grim challenges – for the UK and for L&G itself. But on a basis of seven times this year’s earnings, the insurer looks pretty well protected.