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Legal & General moves to reassure investors over LDI market turmoil

Strong result: Legal & General revealed operating profit rose 8% to £1.16bn in the first half of 2022, just ahead of analysts' forecast of £1.12bn

Legal & General takes action to reassure investors as market turmoil leaves pension clients and LDI counterparties reeling

  • The asset management arm of L&G is one of the largest providers of LDI products in the UK
  • Chancellor Kwasi Kwarteng’s recent ‘mini-budget’ has seriously pissed off markets
  • The Bank of England reacted to the budget with a major bond-buying plan

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

The financial services group has told investors that the “unprecedented” speed of interest rate rises has created difficulties for pension fund clients and counterparties in its so-called liability-driven investing (LDI) division. ).

But intervention by the Bank of England last week eased that pressure, L&G said, as its annuity portfolio had no trouble meeting collateral calls, and it was not forced to offload assets due to sufficient capital and liquidity reserves.

L&G’s asset management arm is one of the nation’s largest 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 profit rose 8% to £1.16bn in the first half of 2022, just ahead of analysts' forecast of £1.12bn

Strong result: Legal & General revealed operating profit rose 8% to £1.16bn in the first half of 2022, just ahead of analysts’ forecast of £1.12bn

The now infamous ‘mini-budget’ by Chancellor Kwasi Kwarteng, which included plans for unfunded tax cuts, further deepened the LDI turmoil last week, with soaring gilt yields putting a large number of plans British pensions in danger of collapsing.

But the Bank of England responded with a £65bn bond-buying program to calm government debt markets, a move which L&G said lowered real interest rates and ” has helped ease the pressure on our customers.”

Despite continued market turbulence, the FTSE 100 insurer noted that demand for global pension risk transfers (PRTs) was “accelerating” as higher interest rates and higher credit spreads have led to a reduction in financing gaps.

The group’s pensions business has now written PRT volumes worth £5.8bn so far this year, after completing two major deals last week.

Among the deals the firm has completed in 2022 is one worth over £2bn with the British Steel Pension Scheme and one involving Rubbermaid, a division of consumer goods maker Newell Brands .

L&G said it had “maintained the positive momentum seen in the first half of the year and continues to deliver in the second half, despite the prevailing macroeconomic conditions”.

He added: “Volatility increased significantly in the second half, but this has a limited economic impact on our business.”

L&G expects full-year operating profit to rise in line with first-half growth of 8%, while capital generation is expected to reach £1.8bn.

Meanwhile, the group estimates its solvency coverage ratio – a company’s availability to meet its long-term debt obligations – in September was 235-240%, an increase of 23 percentage points. compared to the end of the first semester.

Sir Nigel Wilson, Chief Executive of L&G, said: “Our business is resilient and we are on track to deliver good growth in key financial indicators for the 2022 financial year.”

‘Our balance sheet and liquidity position remain strong, and our businesses are very cash generative. We continue to work closely with our clients to support them during this period of heightened market volatility.’

Shares of Legal & General Group rose 4.8% to 232.5p by mid-morning on Tuesday, although their value has fallen by around a quarter this year.

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