A drop in life expectancy has enabled Legal & General (>> Legal & General) to release reserves against mortality risk, it said on Wednesday, driving first-half profits up by an above-forecast 27 percent.
The insurer and asset manager's shares fell over 2 percent towards the bottom of the FTSE 100 <.FTSE> index, however, as some analysts said the release flattered earnings.
Recent British mortality statistics suggest the trend for longer life expectancy has tapered off, allowing life insurers to set aside less cash for pension payments.
"People have been dying much quicker than anyone had expected which as a consequence...gives us extra cash," L&G Chief Executive Nigel Wilson told a media call.
First-half operating profit rose to 988 million pounds ($1.28 billion), with a 126 million pound release against mortality, compared with profit expectations of 821 million pounds, according to a company-supplied consensus forecast.
One-off items including the mortality release "skew visibility" on the company, UBS analysts said, reiterating their "sell" rating on the stock.
However, other analysts said such cash releases could continue, with Barclays pointing to "longevity trends not being as onerous as once expected".
L&G said it would pay an interim dividend of 4.3 pence per share, up 7.5 percent and in line with forecasts. The interim dividend is set at 30 percent of the prior year full-year dividend.
BACK BOOK BUYS?
L&G has been growing in the bulk annuity market, which involves taking on the risk of company defined benefit, or final salary, pension schemes. This is seen as an expanding market as many schemes are in deficit and companies want to offload them.
L&G said its new bulk annuity business more than doubled to 1.6 billion pounds in the first half and it was quoting on another 12 billion pounds of bulk annuity deals.
It said it was interested in further closed books of annuities, which pay a fixed income for life, after buying a 3 billion pound book of UK policies closed to new customers last year from Dutch insurer Aegon (>> Aegon).
Standard Life (>> Standard Life) and Prudential (>> Prudential) both have large closed annuity books.
Standard Life's chief executive told Reuters he was open to the sale of the company's 16 billion pound book, while sources also speculate about a sale of some or all of Prudential's 45 billion pound book, after it stopped writing new annuity business earlier this year.
Wilson said he was eager to hear about this type of sale.
"There are a number of people who are looking at getting rid of their back books and if you could just remind them, it's One Coleman Street, Nigel Wilson...pick up the phone and call," he told the call, referring to L&G's headquarters.
Legal & General Investment Management, one of the biggest investors in the UK stock market, is getting close to a trillion-pound unit after seeing funds under management rise 13 percent to 951 billion pounds. The division focuses on passive funds.
Active fund managers are bulking up to resist the pressure from passive competitors, with Standard Life and Aberdeen Asset Management (>> Aberdeen Asset Management) completing an 11 billion pound merger next week.
L&G shares were trading at 270 pence per share at 0839 GMT, the second-worst performer in the FTSE 100 index <.FTSE>.
(Reporting by Carolyn Cohn; Editing by Simon Jessop and Susan Thomas)
By Carolyn Cohn