L&G is an insurer with a fossil fuel-style problem

Breaking bulk. António Simões has a busy to-do list. The new CEO of 14 billion pound ($18 billion) UK insurer Legal & General has taken over a company whose share price noticeably lags peers. Meanwhile, his golden goose – the booming “bulk annuities” business, where insurance giants buy pension obligations from companies – will eventually run out.

In some ways, the former HSBC executive has inherited a healthy patient. His predecessor Nigel Wilson presided over a 360% total shareholder return during his decade in charge, fuelled by a roaring bulk annuities arm. In 2023, that business accounted for 43% of the company’s 2 billion pound operating profit. Global revenues in that division also grew by more than 40% last year.

Yet L&G’s focus remains largely post-Brexit UK. That’s one reason why the group lags more diversified European rivals like Allianz and AXA. Over the past five years, its share price has fallen by nearly 15%, underperforming the European duo and even domestic rival Aviva.

One problem is that not all of Wilson’s ideas turned to gold. As well as bulk annuities, his Legal & General Capital arm invested company funds in British urban regeneration projects, clean energy, housing and the financing of small and medium-sized businesses. Last year, amid a slowdown in the UK economy, that division’s operating profit flat-lined. The operating profit of L&G’s investment arm Legal & General Investment Management (LGIM) also declined 19%.

The bulk annuity business at least remains in rude health and pension consultants LCP think the UK market could generate as much as 355 billion pounds worth of deals in the next five years. But the corporate pension schemes that feed it are no longer being created. Like the oil market which is expected to see falling demand as the realities of climate change kick in, L&G’s growth in this area will one day decline.

Simões’ main objective will be to find a different engine. Maybe this lies abroad: Wilson already established a retirement unit in the U.S. which could provide new opportunities in the bulk annuity market. There’s also an insurance unit in North America which grew sales by 39% to $160 million in 2023. Last year, L&G announced it is expanding its direct real estate investment business into the U.S. for the first time. But international insurance expansion doesn’t always work. Rival Aviva has retreated from all but two foreign markets having struggled to win enough market share abroad.

Simões will reveal his plans for the company in June. If they aren’t sufficiently compelling, L&G will continue to get marked down.