Does Share Price Plunge Make Legal & General Group Plc A Buy?

DoubleAt the end of January I described Legal & General Group (LSE: LGEN) (NASDAQOTH: LGGNY.US) as a momentum stock firing on all cylinders. Suddenly, the wheels have come off. The insurer has suffered two crunching collisions. Its share price is down almost 15% as a result. Is this an opportunity to buy a good company on bad news, or has it suffered serious damage?

The life insurance sector is hurting right now, and will take time to recover. Chancellor George Osborne’s populist decision to allow pension savers full access to their pots at retirement, rather than forcing them to buy an annuity, hit L&G hit harder than any other insurer. Its share price fell 12.45% on the day, against a mere 7.47% for rival Aviva. L&G has since warned that the total annuity sector will fall by 75%, from £11.9 billion to just £2.8 billion a year. Since the reforms come in from next April, that is a clear and present danger.

The Upside Of Drawdown

But the market may have overdone it. L&G has been at pains to point out that £21.1 billion of its £34.4 billion annuity assets comes from corporate transactions, which Osborne hasn’t touched. L&G doesn’t just sell annuities, it also boasts a huge asset management business, and a strong brand. 

Most pensioners won’t be buying Lamborghinis with their pension pots, they will be looking for alternative ways to invest the money, such as income drawdown and their expanded £15,000 Isa allowance. L&G has a strong presence in both these areas. It also has a thriving protection and defined contribution pensions business. It will have to adapt, but it should survive. 

L&G should recover faster from the second blow, the Financial Conduct Authority’s announcement that it is launching an investigation into £150 billion worth of ‘zombie’ life policies sold between 1970 and 2000. This raised the spectre of another PPI-style mis-selling scandal and a bumper compensation payout, a spectre the FCA is now hurriedly trying to dispel. 

The FCA has said that it won’t be investigating individual policy sales, as originally feared, or retrospectively declaring charging structures non-compliant. It probably won’t even order insurers to scrap the hefty exit-penalties on their policies.

Insurers are furious at FCA chief Martin Wheatley, saying that he should resign because of his blunder. Investors should thank him, for giving us a potential buying opportunity. Should you take it?

Down But Not Out

There’s no doubt the annuity ruling is a blow, but it’s one L&G can recover from. From next April, there will be a swarm of newly-wealthy pensioners looking for somewhere to put their money, and they won’t want to stick it in cash. L&G’s recent turbo-charged performance suggests it can rise to the challenge. Just look at how it raced ahead of the game to pour its talents into index trackers. The rest of the retail investment industry is only just beginning to catch up.

Investors are being rewarded for the current uncertainty. Two months ago, L&G traded at 15.5 times earnings. Today, that has fallen to 13.5 times. The yield has leapt from 3.5% to 4.5%. Yes, one of the pillars of its success has been kicked away, but that’s why you’re getting it at a knockdown price.

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Harvey owns shares in Aviva.