LONDON - Legal & General demonstrates the virtues of clarity. The British insurer delivered a 7 percent year-on-year rise in operating profit in the first half, beating UK peer Aviva. But the real reason to cheer is that its shareholders have a clearer sense of over how much of the goodies flow through to the bottom line.

Legal & General, which manages assets and buys up pools of retirement products, would be in investor good books anyway by boosting the company’s interim dividend 7 percent year-on-year to 4.6 pence a share. Chief Executive Nigel Wilson could boost this further given the company is forecasting a 400 million pound exceptional profit in the second half of the year as the company benefits from pensioners dying earlier than expected.

But investors should also like the fact L&G’s business is less beset by non-intuitive accounting-speak. The complexity of the sector means insures like Aviva focus on an operating profit figure that excludes restructuring charges, paper losses in the equity market and investment returns failing to hit internal expectations. In Aviva’s first-half results, eight different charges eroded 70 percent of its earnings available to shareholders. Aviva didn’t include these charges in its 12 percent return on equity. If it had, the numerator would have dropped to 315 million pounds, and the return would have been 2 percent.

L&G is less afflicted. In its first-half results operating profit figure was 16 percent above the pre-tax profit, with paper losses on investments of 33 million pounds, versus Aviva’s 579 million pounds. Between 2013 and 2017, the difference between its operating profit and its pre-tax profit averaged only 10 percent, against 35 percent for Aviva. Hence its 20 percent return on equity is closer to the bottom line.

Admittedly, part of the Aviva difference is M&A transactions which lead to goodwill charges and restructuring fees. Moreover, neither company is necessarily selling shares or bonds as they violently swing in the market, so the “above-the-line” operating profit gives a fairer reflection of operating performance. But with L&G trading around twice the value of its assets and Aviva half that, investors are rightly giving a higher value to simplicity.

CONTEXT NEWS

- British insurer Legal & General Group on Aug. 9 reported a 7 percent year-on-year rise in first-half operating profit to 1.1 billion pounds. The group reported higher profit in all units except general insurance.

- Pre-tax profit fell to 942 million pounds from 1.04 billion pounds during the same period last year, after market volatility weighed on the performance of its investment portfolio.

- L&G’s shares were down 1.09 percent to 262.7 pence, at 0713 GMT on Aug. 9.

(Editing by Neil Unmack and Karen Kwok)

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