L&G ups dividend and remains confident for 2011

Investors in Legal and General will enjoy a better-than-expected dividend of 24 per cent after the insurance giant reported profits in line with expectations and a strong outlook.

Despite a drop in full-year operating profit, sales increased by 28 per cent as cuts in state benefits prompted people to make their own provisions.

The 175-year-old insurer – the country's fourth largest– grew worldwide Annual Premium Equivalent sales to £1.8 billion last year from £1.4 billion in 2009.

Group new business jumped 38 per cent to £1.25 billion, net new funds rallied 80 per cent to £3.1 billion and assets under administration increased by 16 per cent to £64 billion.

European Embedded Value operating profit fell 7 per cent to £1.22 billion, but pre-tax profit more than tripled to £1.68 billion from £552 million a year ago.

On an international financial reporting standards basis, operating profit was down 10 per cent at £1 billlion, but pre-tax profit edged up to £1.09 billion from £1.07 billion the year before.

A 24 per cent drop in operating profit at the risk business to £560 million was largely to blame, following a reduction in the positive new business strain in annuities, losses in general insurance due to December's cold weather, and a net increase in reserves of £59 million in respect of annuitant mortality.

But savings profits more than doubled to £115 million from £50 million and investment management made £206 million compared with £172 million last time.

Net cash generation of £728 million was way past the £600 million target. L&G expects to generate £700 million in 2011.

'In 2010 we successfully demonstrated we can both grow the business and deliver improved net cash generation,' says chief executive Tim Breedon. 'We are building a strong track record in delivering cash which, coupled with the high visibility of future cash flows, has given the Board the confidence to recommend a further 25 per cent increase in the final dividend to 3.42p per share.'

Breedon added that he was confident about the group's growth prospects. 'There is consolidation in many of our markets, and this further underpins our confidence that Legal & General will be a growing force as the welfare state retrenches and individuals increasingly look to high-quality, good value risk, savings and investment provision.

'Our balance sheet is strong, each of our business divisions is profitable and cash-generative, and we are delivering excellent results across the group.'

L&G's shares have increased in value by 12 per cent since the start of the year. The final dividend goes up 25 per cent to 3.42p a share, bringing the total for the year to 4.75p, up 24 per cent.

'The EEV NAV was an impressive 132p/share compared to consensus at 126p,' said Barrie Cornes at Panmure Gordon. 'The shares have been impacted by the recent market uncertainties but, in our view, this has created an excellent buying opportunity.'

Jonathan Jackson, head of equities at Killik & Co rates the stock a buy.

He explained in a note: 'Management see good growth opportunities for the group in 2011 and beyond. In the UK, a combination of state retrenchment, an ageing population, increased household savings and continued de-risking activity by pension trustees will drive growth across protection, annuities, savings and LGIM. The group  believes that it has the right business model and product mix for the current economic and demographic environment. Overseas, it sees opportunities to take the bancassurance-based, low-cost savings model into other emerging markets.

'Overall the results were good; slightly ahead of consensus in most areas. On a price to embedded value of 0.8x and a PE of 8.0x, Legal and General appears fairly valued given its relatively low growth profile. Our preferred UK insurance stock is Prudential (PRU.L, 674p, buy).'

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