Legal & General moves to reassure investors over LDI market turmoil

Legal & General has assured investors that recent market turmoil has had a ‘limited economic impact’ on its business operations.

The financial services group told investors that the ‘unprecedented’ speed of interest rate hikes had created difficulties for the pension fund customers and counterparties of its so-called liability-driven investment (LDI) division.

But intervention from the Bank of England last week has eased this pressure, L&G said, while its annuity portfolio has had no trouble meeting collateral calls, and it has not been forced to offload assets due sufficient capital and liquidity buffers. 

L&G’s asset management arm is one of the country’s biggest providers of LDI products, commonly used by final-salary pension funds to protect against dramatic swings in the value of their investments. 

Strong result: Legal & General revealed operating profits increased by 8 per cent to £1.16billion in the first half of 2022, just ahead of analyst predictions of £1.12billion

Chancellor Kwasi Kwarteng’s now-infamous ‘mini-budget’, which included plans for unfunded tax cuts, piled further turmoil on LDIs last week as surging gilt yields put large numbers of British pension schemes at risk of collapse.

But the Bank of England responded with a £65billion bond-buying programme to calm government debt markets, a move L&G said had lowered real interest rates and ‘helped to alleviate the pressure on our clients’.

Despite ongoing market turmoil, the FTSE 100 insurer noted that demand for global pension risk transfers (PRT) was ‘accelerating’ because higher interest rates and greater credit spreads have led to lower funding deficits. 

The group’s retirement business has now written PRT volumes worth £5.8billion so far this year, having completed two major deals last week.

Among the transactions the firm has completed in 2022 include one worth over £2billion with the British Steel Pension Scheme and one involving Rubbermaid, a division of consumer products manufacturer Newell Brands. 

L&G said it had ‘maintained the positive momentum seen over the first half of the year and is continuing to deliver into H2, despite the prevailing macro conditions’.

It added: ‘Volatility has increased significantly in H2, but this has limited economic impact on our businesses.’ 

L&G predicts full-year operating profits will expand in line with first-half growth of 8 per cent, while capital generation is expected to total £1.8billion. 

Meanwhile, the group estimates its solvency coverage ratio – a firm’s availability to meet its long-term debt obligations – in September was 235 to 240 per cent, a 23 percentage point increase from the end of the first-half period. 

Sir Nigel Wilson, L&G chief executive, said: ‘Our businesses are resilient, and we are on track to deliver good growth in key financial metrics for FY 2022.’ 

‘Our balance sheet and liquidity position remain strong, and our businesses are highly cash generative. We continue to work closely with our customers to support them through this period of increased market volatility.’

Legal & General Group shares were up 4.8 per cent to 232.5p during mid-morning trading on Tuesday, although their value has declined by around a quarter this year.

This post first appeared on Dailymail.co.uk