UK insurer L&G beats forecasts but outlook worries

By Clara Ferreira-Marques

LONDON (Reuters) - UK insurer Legal & General Plc (LGEN.L) posted broadly flat first-quarter sales, beating expectations as growth in corporate annuities and a tie-up with building society Nationwide offset weakening market conditions.

The deteriorating outlook for the broader market, pessimism over protection products and L&G's growing dependence on bulk annuity business, however, hit its shares.

They were trading ex-dividend down more than 6 percent on Wednesday.

Britain's third-largest life insurer, the first in the UK sector to report on the first months of 2008, posted worldwide sales of 372 million pounds ($732 million), up 1 percent from the same quarter a year ago. This was at the high end of forecasts and well above an average estimate of 347 million.

L&G is the most domestic-focused of Britain's top insurers and analysts had expected most of its business lines to be hit by high exposure to the UK impact of the credit crunch, particularly the weakening mortgage market.

L&G did see weak protection and individual annuities sales and a drop in savings products like pensions and unit-linked bonds, though these were offset by strong growth in its bulk-purchase annuities business, resulting in an overall UK sales dip of 1 percent to 335 million pounds, at the high end of expectations.

Analysts, however, said the impact of growth in bulk annuities on margins and profits was still unclear.

"It is growing in one line, so if that line stops growing you are in trouble. I am not sure this momentum will be there through the year," analyst Raghu Hariharan at Fox-Pitt, Kelton said. "If you exclude the bulk annuities, growth in the UK is pretty anaemic."

L&G shares were down 5.1 percent at 1252 GMT. L&G has been one of the best performers in the UK market, dipping 5 percent this year but outperforming its UK peers by almost 12 percent.

Analysts said there was little read-across from the sales for other UK insurers, with Prudential (PRU.L), which reports first-quarter sales on Thursday, likely to see weakness at home offset by its strong Asian unit.

PROTECTION WEAK

L&G's individual annuity sales fell in the first quarter, as turbulent markets prompted customers to defer investment decisions, but the strong bulk-purchase segment saw pension buyout sales quadruple from a year ago to 72 million pounds.

L&G said it continued to see high levels of quotation activity and confirmed it expected volumes in the first half would remain in line with a strong fourth quarter, though there was little visibility beyond that.

Later in the day, the insurer announced a 180 million pound pensions buyout deal with paper group M-real, under which L&G will insure liabilities associated with 2,000 scheme members.

The insurer's key protection business, hit by the weak housing market, fell 14 percent year-on-year in the first quarter but remained steady on the last quarter of 2007.