Last week’s news that new retirees would no longer have to purchase an annuity hit the share price of annuity sellers hard, as you’d expect. However, I believe that for Legal & General Group (LSE: LGEN) (NASDAQOTH: LGGNY.US) shareholders, this should be no more than a temporary glitch — and is definitely not a reason to panic sell your L&G shares.
Here’s why.
1. Market reaction shows confidence
While specialist annuity sellers Partnership Assurance and Just Retirement lost around half of their value following the Chancellor’s announcement, Legal & General’s share price just took a gentle step back — it’s down by 9% this week, but L&G shares are still 23% higher than one year ago.
It’s clear that Mr Market doesn’t think that this £12bn giant, which has been in business for more than 175 years, is likely to fade away.
2. Final salary pension schemes
Last year, 68% of L&G’s annuity sales were bulk sales of annuities to final salary pension schemes, which are not expected to be unaffected by this week’s changes.
Assuming the firm’s profits from annuities are roughly in line with its annuity sales, I estimate that the loss of all earnings from individual annuities last year would have wiped around £100m off the firm’s £1.1bn operating profit — hardly a disaster.
Legal & General is likely to remain one of the biggest sellers of bulk annuities, and reports suggest that the Chancellor may protect this business, by putting measures in place to prevent people transferring out of final salary schemes, and into defined contribution schemes.
3. People will still need pensions
Legal & General’s retirement business generates less than a quarter of its profits — and not all of that is from annuities.
The group also has substantial life insurance and asset management businesses: I will be very surprised if L&G’s management is not able to use its trusted brand to develop new retirement products, with more flexible drawdown and income options.
After all, the reality is that many retirees will still need a guaranteed income, and will need a packaged solution to provide it.
Is Legal & General still a buy?
Legal & General shares currently trade on a forecast P/E of 12 and offer a dividend yield of 4.5%. Even if the firm’s earnings fall slightly, I ‘m confident that its dividend — which is covered twice by free cash flow — will be safe.