Christmas has come early for Legal & General. The insurer has seen “great momentum” this year, which has been “particularly strong” in recent weeks, it said yesterday in an apparently glowing trading statement.
So why did its shares only manage a feeble rise before falling 1¾p to 260p, particularly as it came a day after a well-received deal to sell an old savings business in order to focus on other areas of growth?
Part of the muted reaction was because most of yesterday’s guidance had been factored in by investors. L&G is delivering well on its strategy to expand overseas, with strong growth in the US, which Nigel Wilson, chief executive, hopes will help to gain the 181-year-old company the title of Britain’s first trillion-pound investment group. Returns from these investments are used to support about 10 million long-term savings customers and 3,000 large institutional clients.
Closer to home the business is also doing well with efforts to diversify into equity release mortgages, on top of keeping its core pensions annuity business humming. Yet L&G’s shares have been just chugging along, because many in the market believe it does not have the financial capacity to grow its dividend much further. The UK-focused insurer did spend years driving up the payout, but that growth has now been pruned back and investors think the boom times are unlikely to return for the foreseeable future. That message was apparent in this week’s savings deal: L&G has divested its Mature Savings business, which focuses on retail customers who hold traditional insurance-based pensions, savings and investment products, to Swiss Re, in order to capture some capital that it can direct into other areas.
There are other strings to L&G’s bow, of course. Mr Wilson has pushed the insurer into investment in a wide range of areas, including housing and infrastructure. But the long-term projects do not make much profit for L&G — only 13 per cent of the pie in the first half of the year, compared with the half that comes from its retirement division. A big driver of L&G’s business is its annuities division. Annuities businesses are a curious phenomenon. Some insurance companies hate them — Aegon got out last year, Prudential is gearing up to start selling — while others want to gobble them up. Indeed, there are some specialist vehicles that focus on annuities: Rothesay Life and Pension Insurance Corporation both buy up these books of business, crunch together their operating costs and can deliver annuity income to pensions in a cost-efficient way.
Then there are companies in between, including L&G, which does other things but is also a big player in annuities as it believes it can manage the longevity risk efficiently through expertise and reinsurance contracts. It is working well, but the UK regulator, the Prudential Regulation Authority, has some doubts about this use of reinsurance as it is concerned about where the risk ultimately lies.
L&G is searching for more growth and is likely to be a keen bidder for some of the £10 billion book of business Prudential has put up for sale. Price is key to such deals, so the outcome is unclear.
Help could be coming for L&G and its peers. The big insurers have lobbied hard for changes to capital treatment of infrastructure assets and UK authorities are likely to lift some of the burdens in this area.
Also, there are whispers that UK regulators are minded to tweak the EU Solvency II rules after Brexit to make annuities businesses more attractive, so those that have bet big — like L&G — could be well placed.
Advice Buy
Why L&G has been in a trough, but there could be a series of annuities deals, and it has taken the pain on a dividend slowdown
Ferrexpo
To say the least, this is not one for widows and orphans. Ferrexpo, a Ukrainian producer of iron pellets for the steel industry, has had more than its share of thrills and spills. Anyone producing iron ore has had to combat a range of prices stretching from $190 in 2011 to $40 in late 2015. Ferrexpo had an advantage in the collapse of the Ukrainian hryvnia — paying wages in hryvnia and selling iron ore pellets in dollars made life somewhat easier.
The company also had the small matter of writing off $174 million that it had in accounts with a collapsed Ukrainian bank, which also happened to be controlled by Kostyantin Zhevago, its majority shareholder.
In the past couple of years things have looked up. Iron ore prices have recovered. Ferrexpo’s corner of the market has benefited more than most because the Samarco disaster in Brazil curbed supply. Relatively little iron ore is produced in pellet form, where low-grade ore is processed into higher-content pellets, which some steel furnaces are designed to accommodate, and Samarco was one of the world’s largest producers.
Yesterday Ferrexpo underscored the good news by announcing a special dividend of 3.3 cents a share, which comes on top of a 3.3 cents a share interim dividend that reached investors accounts in September. Its policy is to pay a base dividend of 3.3 cents and skim off any surplus cash through a special payout.
It said yesterday it would target “special dividends of approximately $40 million per financial year (or a total of 6.6 cents a share) to be paid at an appropriate time in its reporting cycle”. This helped send Ferrexpo’s London-listed shares up almost 2 per cent to 247p, still some way off its recent high of 324p in September and far below the 441p peak during the 2011 iron ore boom.
While there is an inherent risk in owning Ferrexpo shares, including some political risk relating to Ukraine generally, it is in a privileged position. Some steel plants rely on pellets, which are a cleaner form of iron ore by dint of their superior iron content. Even if overcapacity takes its toll on the wider market, Ferrexpo is in a more clement micro-climate, especially with Samarco’s restart still in the future.
Advice Buy
Why Ferrexpo is in a good corner of the market
