Legal & General's surprise 6% rise in profits boosts insurance sector

Published on Tuesday 5 August 2008 22:07

LEGAL & General galvanised shares in the insurance sector yesterday with a strong interim profits performance that held out better prospects for the industry.

L&G's shares soared 12 per cent to 108.3p as it posted an unexpected 6 per cent rise in operating profits to 626 million on a European embedded value industry standard. That was above an average City forecast of 587m.

The company said a booming pension buyout market helped the group weather difficult economic conditions.

Shares in Edinburgh-based Standard Life, which puts out interim results today, surged 9 per cent, and Prudential and Aviva both climbed 7 per cent.

Most analysts had expected L&G's earnings to remain flat or dip. But the company said sales of bulk annuities, which provide a set income in retirement, more than tripled amid the trend for firms to offload their pension liabilities.

Bulk annuity sales rose from 400 million in the first six months of 2007 to 1.4 billion on an annual premium equivalent basis.

Sales of bulk annuities have traditionally been highly volatile, with performance often skewed by the loss or gain of major company contracts.

But L&G suggested the market was set to remain buoyant. It said an "explosion in demand" was expected to see 10 billion of new business come to market in the industry this year.

The bulk annuity sales offset a 22 per cent fall in sales of individual annuities, hit by increased competition and L&G's pricing policy in the last three months. But the housing market downturn hit sales of insurance protection policies, many of which are linked to mortgages, down 1m at 110m.

Stock market turmoil also wiped 91 per cent off EEV post-tax profits – to 56m – as the falls in equity values led to unrealised losses on investments.

Consumer confidence in savings products had also been knocked by the volatility in equity markets and savers were turning to low risk products, L&G said. Sales of unit-linked investment bonds fell by nearly half to 75m from 136m, although the declines were showing signs of stabilising.

Pensions business rose 22 per cent to 126m in APE sales.

Sales of self-invested personal pensions rose 96 per cent, thanks largely to the inclusion of L&G's recent acquisition Suffolk Life, bought last May.

Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers, said L&G's results had provided investors "with some respite from the negative onslaught of news released via the financial sector". But he added the group's fortunes were still "very much dependent on the UK economy" and the unpredictable UK tax environment.

scrutineer, page 32