Jamie Clark

A unique opportunity to benefit from changes in life expectancy

Jamie Clark

Yesterday Legal & General announced a £206m operating profit boost in the second half of its financial year – the result of recognising trends in longevity improvements (or mortality declines) which we first highlighted ten months ago. Longevity trends are not reversing – we are living longer – but the rate at which life expectancy is improving is slowing down materially.

The Continuous Mortality Investigation 2017 study suggests that life expectancy for a male aged 65 is now 22 years and 1 month, down from the forecast of 22 years and three months in 2016 and significantly lower than the 2014 estimate of 22 years and 11 months.

How can declining improvements in life expectancy be a positive for Legal & General, a constituent of our Population Ageing Macro-Theme?

The answer lies in understanding the significant shade and nuance that lies beneath the surface of this seemingly monolithic mega-trend.

Life insurers such as Legal & General do not have a uniformly linear positive exposure to longevity. To some degree they have internal hedging against it. By way of example, their annuities business is negatively correlated to life expectancy (longer lives = more annuity payouts), while pensions products are positively correlated (longer retirements require a more active approach to savings).

We believe there is now an unusual opportunity to profit from the long-term trend to Population Ageing, while also benefitting from the actuarial adjustment to decelerating longevity improvements.

To explain, the long-term benefits of Population Ageing for these companies have yet to be fully understood and reflected in share valuations, while on the other hand the potential costs – by which we mean higher annuity payouts – have already been factored in. Investors therefore have the opportunity to profit from a process of realisation that both (i) estimated annuity costs are falling and (ii) life insurers have a huge role to play in providing products and services, as the responsibility for retirement saving shifts to the individual and away from the state and corporate sector.

Legal & General’s capital release this year reflects a move to apply the Continuous Mortality Investigation’s 2015 findings. As longevity improvements decelerate, current reserves are deemed overly-cautious and excess capital can be released. The delay in applying 2015 data is the result of a thoroughly prudent approach to the incorporation of changes in mortality trends.

The CMI has been reporting a slowdown in longevity improvements since 2011 and – crucially – has subsequently released 2016 and 2017 reports showing a continuation of this trend. While most analysts are treating reserve releases as one-offs, we think that there is likely to be more to come as these latest studies are adopted. As the Chair of the CMI puts it “the numbers now reflect a trend as opposed to a blip”.

Simply put, reserve releases should increase earnings, help allay capital concerns and permit dividend growth.

Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.

Investment in Funds managed by the Macro Thematic team involves foreign currencies and may be subject to fluctuations in value due to movements in exchange rates. The Fund’s expenses are charged to capital. This has the effect of increasing dividends while constraining capital appreciation. The performance of the Liontrust GF Macro Equity Income Fund may differ from the performance of the Liontrust Macro Equity Income Fund and is likely to be lower than its corresponding Master Fund due to additional fees and expenses.


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Thursday, March 8, 2018, 2:30 PM