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Others (particularly Meconopsis) have posted on this board with greater knowledge and erudition than me on the subject of the dividend cover. But, fwiw, my understanding is that there are two factors at play that make the formal reported profits and therefore dividend cover virtually meaningless. Both stem from changes in the accounting rules.

Firstly, they now have to mark to market their bond holdings and as bond prices have fallen that has resulted in significant hits to the bottom line. As they tend to hold bonds till maturity these losses will in time be recovered but in the short term undermine dividend cover.

Secondly, they used to record the lifetime profits on contracts in the period the contracts were signed. Now they have to spread the profits over the lifetime of the contract. These future profits go into a credit service margin which sits as a liability in the balance sheet. It is a liability to future periods and I add back to net assets when I look at NAV. The CSM is currently greater than the published NAV and as the market cap is roughly on par with the published NAV I think it shows that the company is massively undervalued. Anyway, it also reduces published profits and reduces dividend cover.

A far better measure than dividend cover is to look at the ratio of cash generation to dividend and from memory that is more than satisfactory.

As a result I am happy to be significantly overweight in LGEN and the other UK life insurers.

Fine re points 1 and 2 but why do you think there might be a cut in the dividend?

Is it just because the yield is high or that the nominal dividend cover low? If so it worth remembering that following changes in accounting regulations in recent years dividend cover is a nonsensical metric for the life insurance industry. Cash generation is a better guide to their ability to pay dividends.

Life insurance companies are very complicated beasts to understand.

Why do you think that might happen?

i am not sure that will work. the barbarians are already at the gates and there is something of king **** about the idea of a conliblabgreen pact led by an idle blond tory. i fear the incoming tide will overwhelm them.

3% decline in a morning is quite severe.

There is also the possibility that it could become a target for takeover. A takeover by a large US group would face fewer obstacles than LGEN and it isn’t hard to see why it might be attractive. Though I am happy holding for income the possibility cannot be ignored. For EG Just succumbed to an offer 55% above market price last month. Albeit a much smaller business but still of note.

GLA

Thx D-C and Meconopsis.

I am currently not a holder of MNG but have long term holdings in LGEN and PHNX and thought I’d do a very simplistic comparison of the market cap as a % of the adjusted net assets of each. To get to adjusted net assets I merely add the store of future profits to the latest published net assets on the basis that they are owed to shareholders.

I think the table is as follows (all in £b):

MNG. LGEN. PHNX

Net assets 3. 4. 2

CSM etc. 6. 15. 4

Adjusted net assets 9. 19. 6

Market cap 6. 14. 6

MC as % of aNA. 67%. 74%. 100%

I look at this as indication as to how much of a discount to NAV the company is trading at in the same way I would an investment trust.

Obviously this is only a single measure and v simplistic one at that but it looks to me as though MNG is trading at a bigger discount than the others.

Is this too simplistic? Have I got the figures right?

I would be grateful for any views.

Many thanks

NSC

Can someone remind me how much is in the CSM pot at MNG?

Many thanks

NSC

Interesting discussion over the w/e here I see. Given the chat about diversification and portfolio performance to the end of June I thought I share my experience.

Having come to the conclusion that the general market risk was on the downside I decided to reduce the diversification in my portfolio at the start of the year and am now heavily overweight in both LGEN and PHNX (and pretty event between them). I kept a holding in RR (bought during the pandemic) and have a handful of funds (inc Jupiter India and Schroder Recovery).

As at the end of June I am up 23% across the portfolio for the YTD. RR is up 70%, the funds up 7% and the insurers up 18% on a total return basis. I traded the insurers by selling 5% of my holding before they went ex div and buying back after which worked quite well this time and helped a bit. Plainly the growth in the PHNX sp since March has helped a lot but so has the dividend.

I worried that the lack of diversity in my portfolio would interfere with my sleep patterns but it hasn't. The fact that the dividends alone would double the portfolio in much less than 10 years and that both companies have the next 8 years of profits already booked gave me a lot of comfort.

Not for everyone I realise but I am happy with my decisions. Not sure I could trade like Strictly though.

I love that Fife Robertson anecdote. Thank you

Not to mention lucky to be married to such a legendary investor

I agree. I am expecting a reversion to the mean at some point. Does anyone know what the 10 year average yield is?

It’ll do rather better than doubling. You’ll get your money back in under 8 years. Overall it might be closer tripling in 12 years.

Have you seen reforms polling numbers?

I wouldn’t worry too much about the sustainability of the divi. That question comes up often on this bird and you could do a lot worse than clicking on Meconopsis posting history to find good explanations of of the changes in accounting rules and the CSM.

But in essence they have already booked the next 8 years ‘ish of profits. The issue isn’t that the yield is unsustainably high but more that the share price is too low.

T/y Meconopsis.

CSM cover is a very useful KPI.

But, when I skim read Simoes statement earlier I thought he referred to £14.6b of future profits which I took to be the CSM. Which would push it closer to 9.

The p/e is currently a pretty meaningless measure for the large life insurers following the recent changes in accounting rules that have artificially reduced profits. The two key changes being:

A) a requirement to mark to market the bond portfolios that they actually hold till redemption. This will work itself out in due course but the short term provisions will reduce book profits in the short term.

B) they can now only recognise profits on long term contracts over the life of the contract rather than up front. Quite sensible really but it does have a short term negative impact on booked profits.

Solvency ratios are more important than P/e currently. Circa 2.3 for LGEN currently which underpins confidence in the security of the dividend.

An alternative is to look at NAV and add back the provision for future profits and compare the total (which I think of as the real NAV) and compare to the market cap. Currently LGEN has NAV of £13b after accounting for deferred profits on contracts already written of a further £13b (ie it is profits owed to future periods) vs a market cap of circa £14b. This can be viewed in the same way that one might look at a discount to NAV on an investment trust.

Other posters on this board (such as Meconopsis) have set this out with greater clarity than I am capable of today.

GLA

Https://www.instagram.com/reel/DFa1Yvho1ot/?igsh=amZwOTYyazB6Zndt

Dominic Frisby puts it rather well

Plus you need to take into account the fact that under the new rules the profit on long term contracts must be recognised over the life of the contract and not up front. As a result their balance sheet will contain a liability to future accounting periods. From memory this is about £5b in PHNX case and it could therefore be argued that it is trading at a significant discount to real net assets.

GLA

The Times this am reports Goldman Sachs analysts predicting 6 interest rate cuts over the next 18 months in UK. If they are correct that might help the SP.