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Legal and General - what's going on?

Analysing companies' finances and value from their financial statements using ratios and formulae
Alaric
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Re: Legal and General - what's going on?

#321975

Postby Alaric » June 27th, 2020, 9:49 am

TheMotorcycleBoy wrote:[2] Ok, techical term here, but I'm still getting to grips with comparing LGEN cash flows to more regular (e.g. engineering) firms.


Trying to force the financial reporting of long term contracts into a template designed for regular firms is something of a struggle. In the past, the approach was to build up the accounts in the same way as an Investment Trust, namely ,money in, money out and investment return. Whether the accumulated funds were adequate was a feature of separate reports. Over about the last thirty years, the specialist reporting on liabilities has been shoehorned into the reporting formats in general use with a resulting lack of clarity.

monabri
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Re: Legal and General - what's going on?

#322026

Postby monabri » June 27th, 2020, 12:20 pm

Presentation Slides (412kb pdf)

https://www.legalandgeneralgroup.com/in ... entations/

LGEN discusses its business by these 5 categories.

LGRI & LGRR (discussed as LGR)
LGIM
LGC
LGI

See the table below.

Image

The graphic (above the table) also shows how business has been progressing.

The bonds seem to be held in the "LGRx" parts of the business.

Image

The quality of the bonds are indicated. From Investopedia, bond grades are discussed.

https://www.investopedia.com/ask/answer ... rating.asp

"Higher rated bonds, known as investment grade bonds, are seen as safer and more stable investments that are tied to corporations or government entities that have a positive outlook. Investment grade bonds contain “AAA” to “BBB-“ (or Aaa to Baa3 for Moody’s rating scale) ratings and will usually see bond yields increase as ratings decrease. Most of the most common "AAA" bond securities are in U.S. Treasury Bonds.

Non-investment grade bonds or “junk bonds” usually carry ratings of “BB+” to “D” (Baa1 to C for Moody’s) and even “not rated.” Bonds that carry these ratings are seen as higher risk investments that are able to attract investor attention through their high yields."

In the graphic, LGEN report that 99% fall into "investment grade" bonds.

I'm sort of coming to the conclusion that whilst one should be alert, the track record looks pretty good. I assume that LGEN have a consistent method of handling and reporting their finances and not indulging in "creative accountancy".

Dod101
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Re: Legal and General - what's going on?

#322037

Postby Dod101 » June 27th, 2020, 12:50 pm

monabri wrote:I'm sort of coming to the conclusion that whilst one should be alert, the track record looks pretty good. I assume that LGEN have a consistent method of handling and reporting their finances and not indulging in "creative accountancy".


After all that I am so glad that you have come to the same conclusion as I have. I did not do all your work though. I have known L & G professionally for about 50 years ands as an investor for at least the last 25 years. They seem to me to be the epitome of good culture which I keep on about. If they were getting it wrong they would have been 'outed' by now. Culture does not really change much over the years. People either fit in or they leave. Directors will usually recruit someone to fill their ranks who is 'one of us'.

Besides, on a much more down to earth assessment, the last RNS was very reassuring but of course you need to decide if you are going to believe them or not. I choose to believe them. Their track record is excellent and what is more they have pretty much 'stuck to their knitting' with no real mega mergers that I can remember. They can be a big source of problems, culturewise, and other baggage, which is part of the problem of Aviva for instance. These items are very important to me in investing, more important than all the accounting analysis that you can do

On the matter of 'creative accountancy' all companies can of course indulge in that from time to time but I think a closely regulated company like L & G is unlikely to do so and in any case they are usually found out before long.

Dod

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Re: Legal and General - what's going on?

#322050

Postby monabri » June 27th, 2020, 1:35 pm

"Outed"...that's the word I was looking for!
;)

TheMotorcycleBoy
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Re: Legal and General - what's going on?

#322069

Postby TheMotorcycleBoy » June 27th, 2020, 2:34 pm

Thanks to everyone, who has helped make this debate an interesting one. Having about 3.2 or so % in LGEN, I obviously want the best for them. Their business is notoriously difficult to analyse, but still I find it useful to contemplate.

The large negative in their Gross (and then Net) CFO is almost certainly due to them spending more than they receive in cash over the last 2 periods, it is of course, more than likely, that in the next period they will curtail this purchasing behaviour and the Gross CFO will return into it's usual terrority. Who knows? What does seem slightly easier to predict however is that their interest/dividend inflows will fall. However as many here have stated already, they survived the GFC, and of course the insurance and pension business isn't going to vanish.

What still intrigues me however is what these particular recently acquired assets are. From reading on from the CEO's statement on page 4, I believe it must be a result of these investments:

..we were able to execute some record- breaking pension de-risking deals in 2019, generating £11.4 billion of sales and £1.2 billion of operating profit. Our individual retirement business saw annuity sales increasing by 22% to £970 million.

Historical under-investment has created the opportunity for us to put pension savings to use, with £26 billion invested to date in direct investments, helping to transform towns and cities. At the same time, globalisation of asset markets has led to our investment management business now looking after £1.2 trillion of assets, £370 billion internationally.

In 2019, our pension annuity assets increased to £76 billion, providing further capital for these investments.

This year we continued to invest in renewable energy infrastructure. This included one of the UK’s largest electric vehicle charging providers, with our total clean energy investments to date totalling £1.3 billion.


But presumably a lot of the above would result in additional long term (non current) assets, whereas if I'm correct the Assets/Liabilities considered in the "Change in working capital" section of the Cash flow statement are "Current" i.e. entities which effect the running of the business in the current (i.e. a year) period. So am I correct in understanding that the Operating Asset increases which likely reduced the LGENs gross CFO position for the year 2019 are merely the "current part of those investments?" That is the Fair values of the portions of those total assets which matured/expired for just the current period (i.e. 2019 just gone)?

Matt

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Re: Legal and General - what's going on?

#322071

Postby unperplex » June 27th, 2020, 2:41 pm

LG are my biggest holding and will continue to be.I think they will be much less adversely affected by the coronavirus lockdown etc.than many companies. Indeed it may be to their advantage in relation to their annuity business. I recollect at the start of the lockdown a senior LG officer was interviewed on the news and asked if his company would be badly hit.He replied, rather disingenuously, that the more people died, (“unfortunately, of course”), the better off a business like LG was.
I note above that the Directors have considerable freedom about when these “Windfalls”appear in their profit/loss accounts and they may well spread them out to bolster performance figures over time.

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Re: Legal and General - what's going on?

#322072

Postby scrumpyjack » June 27th, 2020, 2:44 pm

Yes I think they are a much better operation than Aviva but when you look at the numbers there are significant risks which it is impossible for the PI (and probably the analysts also) to evaluate. Their market value is 12.9 bn but that is tiny compared to the numbers in their pensions and annuities business.

The liabilities are very hard to evaluate as they go on for 30 years or more, inflation indexed etc, affected by longevity etc. On the asset side it is very hard to predict what the returns will be, in real terms, on their investments over the same period. Also we have no idea how much of the risk has been laid off in reinsurance and how much is left with them.

So I wouldn't bet the farm on them but I'm happy to continue holding what is one of my smaller holdings.

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Re: Legal and General - what's going on?

#322075

Postby unperplex » June 27th, 2020, 2:57 pm

No, no farms will be bet by me. I have no doubt running such a business is very complex. In a sense it is like gambling, in that a lot depends on how the factors you list develop in the future.However, as others have said, they are a long-established business and as an investor one has to trust that they know what they are doing.Their history indicates that they probably do.

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Re: Legal and General - what's going on?

#322078

Postby dealtn » June 27th, 2020, 3:08 pm

unperplex wrote:LG are my biggest holding and will continue to be.I think they will be much less adversely affected by the coronavirus lockdown etc.than many companies. Indeed it may be to their advantage in relation to their annuity business. I recollect at the start of the lockdown a senior LG officer was interviewed on the news and asked if his company would be badly hit.He replied, rather disingenuously, that the more people died, (“unfortunately, of course”), the better off a business like LG was.
I note above that the Directors have considerable freedom about when these “Windfalls”appear in their profit/loss accounts and they may well spread them out to bolster performance figures over time.


Crudely (all else being equal - which isn't the case) more deaths "suits them". In fact they don't need more deaths, but an adjustment (downwards) in longevity. So it isn't just deaths from Covid that "help" but also re-modelling such that a Covid type event is increased in likelihood, and severity, from say a mild 1 in a 100 year event, to a severe 1 in a 25 year event.

The Directors don't have "considerable freedom" in how this appears in their profit/loss numbers as the mortality tables will be produced with a degree of independence, but there is (actuarial) industry wide inertia, generally speaking, in ensuring mortality table adjustments are gradual and considered and not volatile. Even if it were generally accepted that both more people had died, but also that more would die sooner with potential repeat viral episodes, this acceptance wouldn't automatically be "modelled" in a "gap change" type way, but the change would likely be challenged and applied with an amount of graduation.

The end result may well look similar with profit "gains" from remodelling occurring over a number of years, not in one go, which resembles the kind of "reserving" you would see with Director "freedom".

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Re: Legal and General - what's going on?

#322109

Postby unperplex » June 27th, 2020, 5:50 pm

Aha.Very interesting. Thanks.

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Re: Legal and General - what's going on?

#322196

Postby 77ss » June 28th, 2020, 4:49 am

scrumpyjack wrote:...... Also we have no idea how much of the risk has been laid off in reinsurance and how much is left with them.....


Actually:

Gross longevity exposure was £80.4bn across LGR's annuity and longevity insurance business. We have reinsured £31.3bn of longevity risk with thirteen reinsurance counterparties, leaving a net exposure of £49.1bn. We continue to see significant supply and competition in the reinsurance mark

From their last annual report.

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Re: Legal and General - what's going on?

#322209

Postby TheMotorcycleBoy » June 28th, 2020, 8:41 am

dealtn wrote:Crudely (all else being equal - which isn't the case) more deaths "suits them". In fact they don't need more deaths, but an adjustment (downwards) in longevity. So it isn't just deaths from Covid that "help" but also re-modelling such that a Covid type event is increased in likelihood, and severity, from say a mild 1 in a 100 year event, to a severe 1 in a 25 year event.

The Directors don't have "considerable freedom" in how this appears in their profit/loss numbers as the mortality tables will be produced with a degree of independence, but there is (actuarial) industry wide inertia, generally speaking, in ensuring mortality table adjustments are gradual and considered and not volatile. Even if it were generally accepted that both more people had died, but also that more would die sooner with potential repeat viral episodes, this acceptance wouldn't automatically be "modelled" in a "gap change" type way, but the change would likely be challenged and applied with an amount of graduation.

Thanks for providing this nice summary of the effect of Covid on LGEN's pension business. I have to admit that after more contemplation I'm feeling more upbeat about my current holding, and may actually consider a small topup.

I have a question for you: so would you broadly agree with my back-of-fag-packet analysis, of LGEN's negative Gross CFO? That being, that it is merely due to large rise in what they view as the "current portion" of Operating Assets - namely significant increases in their investment portfolio.

I did take a quick look at the Balance Sheet from AR2019:


Certainly the largest figure in the Balance Sheet is the Financial investment line, so perhaps my idea does have an element of truth.

Matt

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Re: Legal and General - what's going on?

#322220

Postby dealtn » June 28th, 2020, 10:04 am

TheMotorcycleBoy wrote:I have a question for you: so would you broadly agree with my back-of-fag-packet analysis, of LGEN's negative Gross CFO?


I don't have time now, and time is what you need. You can go mad analysing a financial company, so much easier with others.

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Re: Legal and General - what's going on?

#322229

Postby Alaric » June 28th, 2020, 10:55 am

TheMotorcycleBoy wrote:Certainly the largest figure in the Balance Sheet is the Financial investment line, so perhaps my idea does have an element of truth.


With annuities, L&G are guaranteeing a financial outcome, an income for life. They receive money and invest it. Provided over time the returns on the investments exceed the amounts paid out over the lifetimes of the annuitants, then they make a profit. If they have good years for writing new business, they have lots to invest as a consequence.

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Re: Legal and General - what's going on?

#322261

Postby TheMotorcycleBoy » June 28th, 2020, 1:07 pm

Alaric wrote:
TheMotorcycleBoy wrote:Certainly the largest figure in the Balance Sheet is the Financial investment line, so perhaps my idea does have an element of truth.


With annuities, L&G are guaranteeing a financial outcome, an income for life. They receive money and invest it. Provided over time the returns on the investments exceed the amounts paid out over the lifetimes of the annuitants, then they make a profit. If they have good years for writing new business, they have lots to invest as a consequence.

Thanks,

Which is what I can only assume they've done in spades over 2018-2019. It's almost as if they quite wilfully overreached, perhaps with the knowledge of being able to dip into either existing cash balances or short term debt, to fund their dividend.

Matt


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