Legal & General: dual downgrades put focus on pension risk transfer margins and cash cover
The insurance giant faces increased scrutiny from analysts as JPMorgan and RBC raise concerns about competition, cash coverage, and valuation after strong H1 results.
Back-to-back downgrades challenge investment thesis
JPMorgan Cazenove downgraded Legal & General (L&G) on Wednesday, 13 August 2025 - to Neutral (from Overweight) - and cut its price target to 275p (from 290p).
For context, RBC Capital also downgraded L&G to Underperform about three weeks earlier, in late July, creating an situation where two major brokers have turned more cautious in quick succession.
JPMorgan Cazenove said upgrades after H1 were only modest and it sees "limited scope for positive surprises" versus consensus. The firm flagged relative valuation, ongoing negative investment variances that weigh on net profit, dividends and buybacks not covered by free cash flow, and rising competition in UK pension risk transfer (PRT) as key concerns affecting its outlook.
RBC highlights intensifying competitive pressures
RBC Capital Markets on 22 Jul 2025 downgraded L&G to Underperform (from Sector Perform) and trimmed its price target to 220p. RBC cited intensifying competition and softening demand in UK PRT, pressure on volumes and margins, and forecasts below consensus for earnings and capital generation (fiscal year (FY)25–FY27).
The firm highlighted sub-1x dividend cover out to FY27 and a dividend yield that looks expensive versus gilts. It then reiterated Underperform on 12 August and cut the price target again to 200p, pointing to "headwinds aplenty."
RBC's concerns about PRT profitability headwinds, weaker outlooks for asset-management fee and retail earnings, and some unexpected negatives on the IFRS balance sheet suggest deeper structural concerns about the business model.
This double downgrade from RBC, with a particularly aggressive price target reduction to 200p, reflects growing pessimism about L&G's ability to maintain its competitive advantages in core markets.
According to LSEG Data & Analytics, 2 analysts retain a ‘strong buy’ rating and 3 a ‘buy’ for L&G, with 7 having a ‘hold’ and 2 a ‘sell’ rating (as of 18/08/2025).
Legal & General LSEG Date and Analytics chart
According to TipRanks Legal & General retains its ‘8 Outperform’ Smart Score and its ‘hold’ rating (as of 18/08/2025).
Legal & General TipRanks Smart Score chart
Strong H1 results fail to convince sceptics
L&G's H1 2025 update showed core operating earnings-per-share (EPS) up 9% and management raising guidance for back-book optimisation and other Solvency II management actions, evidence the engine is still running. But the debate has shifted to the quality and durability of profits amid a crowded PRT field and capital coverage optics.
The 9% earnings growth demonstrates that L&G's core operations continue to generate solid results, though analysts are questioning whether this performance can be sustained as competitive pressures intensify.
Management's ability to raise guidance suggests confidence in near-term execution, but the market is increasingly focused on medium-term challenges that could affect the sustainability of current profit levels.
The shift in analyst focus from headline growth to profit quality reflects concerns that reported earnings may not translate effectively into distributable cash or sustainable competitive advantages.
Competition intensifies in pension risk transfer market
Competition is heating up in UK PRT, with new and scaled entrants (including private-capital backed platforms) that could cap new-business margins and slow contractual service margin (CSM) growth - the backlog of profit an insurer has already locked in on in-force policies but hasn’t booked yet - even if L&G continues to write large volumes.
This competitive pressure represents a significant challenge to L&G's market leadership, as new entrants with different cost structures and return requirements may be willing to accept lower margins to gain market share.
L&G's ability to maintain pricing discipline while defending market share will be crucial for preserving the profitability that has underpinned its investment case and dividend policy.
Cash coverage concerns weigh on shareholder returns
Both broker houses worry about dividends and buybacks outpacing free cash flow and operational capital generation in the near term, raising questions about the sustainability of current shareholder return policies.
Valuation concerns have emerged after the rally into results, with JPMorgan seeing limited upside versus peers on earnings revisions, while RBC argues the yield looks rich versus gilts and peers.
Accounting and variance noise, including negative investment variances and balance-sheet items, have muddied the print-to-cash narrative and raised caution about sustainability.
These cash flow concerns are particularly important for income-focused investors who have been attracted to Legal & General's historically reliable dividend payments and share buyback programmes.
Potential catalysts for sentiment reversal
Evidence of disciplined, high-margin PRT wins despite competition, including deal disclosures and pricing commentary, could help restore confidence in the company's competitive positioning.
Clearer coverage of dividends and buybacks by free cash and operational capital generation, not just management actions, would address one of the key concerns raised by both downgrading brokers.
Stabilisation of investment variances and cleaner financial optics could improve transparency and reduce uncertainty about the quality of reported earnings and their translation into distributable cash.
Delivery versus guidance from the H1 outlook, including any uplift to capital generation and solvency through 2026, would demonstrate management's ability to execute on their strategic priorities.
Legal & General share price technical analysis
The L&G share price – up close to 13% year-to-date – made a seven-month high at 265.7 pence on Friday despite the recent broker downgrades but slid on Monday morning.
Since last week’s high has been accompanied by negative divergence on the daily Relative Strength Index (RSI), it is likely that the current correction may unfold further and drive the share lower towards its 55-day simple moving average (SMA) and the April-to-August support line at 255.2p-to-254.00p.
Daily Legal & General candlestick chart
A fall through the support line would put the July-to-early August lows at 249.8p-to-245.8p on the map. Provided that it holds, the medium-term uptrend remains intact.
Were a fall through the July trough at 245.8p to occur, though, the 200-day SMA at 240.2p may be revisited. Perhaps the February-to-May lows at 232.7p-to-233.5p as well.
As long as the July low at 245.8p holds, though, another up leg may ensue. A rise above the current August high at 265.7p would likely engage the February peak at 266.2p.
Investment implications for Legal & General shares
For investors considering L&G following these analyst downgrades, the company presents a more complex risk-reward proposition than its strong H1 results might initially suggest.
- Research L&G's competitive position in pension risk transfer, cash generation capabilities, and strategic initiatives to understand the investment case.
- Consider how competition, regulatory changes, and cash flow dynamics might affect the company's ability to maintain its dividend and growth trajectory.
- Open an account with IG by visiting our website and completing the application process.
- Search for 'Legal & General Group' or its ticker 'LGEN' on our trading platform or app.
- Consider appropriate position sizing given the analyst concerns and potential for continued volatility around competitive dynamics.
Share dealing (https://www.ig.com/uk/shares/share-dealing-uk) provides direct exposure to Legal & General's dividend yield and potential recovery story for investors who believe the analyst concerns are overblown.
Spread betting and CFD trading offer flexible approaches for trading around earnings announcements and analyst recommendation changes.
L&G remains a scale leader in a structurally growing PRT market, but two downgrades in quick succession underline near-term questions about margin resilience, cash coverage, and valuation.
Bulls will point to the pipeline and operating momentum; bears will ask for proof of margin discipline and self-funded distributions in a more competitive field. For now, the street's bar has edged higher on scrutiny and lower on multiples.
The investment case for L&G will likely depend on management's ability to demonstrate that operational excellence can overcome competitive pressures while maintaining the cash generation necessary to support its attractive shareholder return policies.
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