Today I am looking at why I believe Legal & General Group (LSE: LGEN) (NASDAQOTH: LGGNY.US) is poised to surge higher.
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Infrastructure drive ready to deliver
Following the recently re-jigged European Union Solvency II rules, Britain’s insurers are betting big on UK infrastructure to create substantial gains over the long term. The changed legislation has reduced up the amount of capital that the continent’s insurance heavyweights have to hold on their books in order to meet potential claims.
Legal & General has responded to this aggressively in recent months, and in January spelled out plans to spend £5bn over the next decade in order to build five new towns in the UK. The company has identified the mounting problem of housing demand exceeding supply as a major growth driver in the coming years, having also purchased homebuilder CALA Homes with private equity fund Patron Capital for £210m in 2013.
Acquisitions tipped to boost business flows
But back at its traditional businesses, Legal & General continues to enjoy mammoth new business flows not just in the UK but across the globe. Gross inflows at its investment management arm have accelerated in recent months, rising 71% during July-September to £15.4bn and taking total inflows 65% higher to £42.1bn during the first nine months of 2013.
And I fully expect the firm’s exceptional ability to chuck up plenty of cash — in addition to the aforementioned relaxation of capital-holding rules — to prompt a fresh wave of M&A activity to encourage new business. News in January that the Co-operative Group had pulled out of discussions to sell its general insurance arm should not deter Legal & General from seeking new targets elsewhere, possibly in developing regions where insurance product penetration remains low.
Legal & General has put the fallout of the 2008/2009 banking crisis firmly behind it and is primed to punch further solid earnings growth this year and next. City analysts expect the firm to follow up an expected 12% earnings improvement in 2013 — results for which are due on Wednesday, March 5 — with advances to the tune of 9% and 8% in 2014 and 2015 correspondingly.
Even though the company has enjoyed a share-price surge in recent days, these figures leave the insurance leviathan changing hands on P/E ratings of 14 and 13.1 for these years, comfortably surpassing an average reading of 15.3 for the rest of the life insurance sector.