Anthony Hilton: Legal & General profits by planning for the long term

The boss of one of America’s biggest insurance companies told a meeting of his peers a few years ago that if interest rates stayed at their rock-bottom level, his firm would eventually go bust.

Indeed, he said, the only thing that would put them in even worse trouble would be if rates moved sharply and unexpectedly higher. Then he would go bust more quickly.

He was joking — but only just. Most of the savings and pensions products offered by life assurance companies contain some kind of minimum guarantee — which, in effect, is the promise that the firm will deliver a reasonable lump sum to clients disciplined enough to save with the institution for 10, 15 or 25 years.

But when investment returns and interest rates are close to zero it becomes very difficult to deploy the money well enough to generate the returns needed to meet those guarantees and cover the costs of doing so. The longer rates stay low — and they have been down there now for eight years — the harder it becomes.

Fortunately for the UK, even though British insurance companies face a similar set of challenges, they manage them a lot better.

The Prudential, for example, has developed a business selling investment products free from guarantees in Asia — a region with a rapidly growing middle class which is still willing to pay the relatively high charges western consumers balk at.

Aviva’s focus has been on bringing discipline to an empire which previous bosses found too sprawling to manage. The new team which arrived three years ago has closed or sold the serial underperformers and left the others in no doubt of what is expected of them. The group’s fortunes have improved dramatically as a consequence.

Legal & General’s profits today demonstrated that it also knows how to live in the modern world: operating profits are up 14%, adjusted earnings per share are up 11% and the dividend has risen by 19%. The cumulative effect of this — it has been producing similar returns for the past five years — is a group half as big again as it was half a decade ago.

What has caused this growth is a decision from around that time to focus the business around five key themes which management believed played to the group’s strengths — ageing populations; the globalisation of asset markets; the creation of real physical assets; welfare reform and the digital revolution. These have been the primary focus since then and, as a result, each year brings greater rewards.

Chief executive Nigel Wilson is unusual in the ranks of modern management in that his time at business school did not rob him of his ability to speak clearly and robustly on matters of public interest which also concern his business.

Although most of his peers find even the bland and the banal too much of a stretch, Wilson — in regular blogs and newspaper articles — probes relentlessly at the challenges of an ageing society, the shortcomings of the financial system, the deficiencies of modern investment theory, the flawed actions of central bankers, the timidity of politicians and the reluctance of almost everybody to be honest about the challenges we face.

He is particularly scathing about the Government’s and others’ reluctance to borrow at today’s rock-bottom rates to finance the building of infrastructure which would boost economic efficiency in the future and deliver the gains in productivity which would allow real incomes to rise.

He scorns the orthodoxy that pension fund money should be invested in low-risk assets such as bonds, given that these assets are almost guaranteed to lose money in an era of negative interest rates.