Legal & General Group has issued a trading statement in a bid to reassure the market over its liability-driven investment (LDI) and pension risk transfer (PRT) businesses following the volatility of the past week.
In the statement issued this morning (4 October), the insurer said it had maintained the positive momentum seen over the first half of the year and was continuing to deliver into the second half, despite the prevailing macro conditions.
It said while volatility has increased significantly in the second half of the year, this had "limited economic impact" on its businesses.
L&G specifically updated the market on Legal & General Investment Management's (LGIM) LDI operations - saying that the recent extraordinary increases in interest rates, and the unprecedented speed of those increases, had caused challenges for the pension fund clients and counterparties of LGIM's UK LDI business.
It said the Bank of England's announcement last Wednesday to carry out purchases of long dated gilts in a temporary and targeted way to restore orderly market conditions had "helped to alleviate the pressure" on its clients - adding it was continuing to work closely with them to achieve appropriate hedging levels in their portfolios.
It added: "LGIM acts as an agent between our LDI clients and market counterparties and therefore has no balance sheet exposure."
L&G said its annuity portfolio continues to perform well and demand for global PRT is accelerating.
It said: "Despite volatile markets, the group's annuity portfolio has not experienced any difficulty in meeting collateral calls and we have not been forced sellers of gilts or bonds.
"One of the strengths of the UK insurance regime is that we regularly monitor and stress our capital and liquidity requirements to a one in 200 stress level so that we can withstand shocks like we have seen in the past few days. We hold considerable buffers over these prudent requirements and have a wide array of tools available to manage collateral calls - for example, being able to post a variety of different types of assets, or assets in different currencies, as collateral."
The firm added: "Demand for global PRT continues to increase, with funding deficits reducing because of rising interest rates and widening credit spreads.
"Legal & General Retirement Institutional (LGRI) has transacted or is in exclusive negotiations with a further £1.3bn of PRT since H1, including two transactions signed last week, taking the total written year to date to £5.8bn. The global pipeline for the remainder of 2022 and into 2023 is the busiest we have ever seen, and we are on track to deliver another strong result this year."
It said volumes continued to be written at margins and capital strain in line with the firm's long-term average, and it expected the UK annuity portfolio to be self-sustaining again in 2022.
Solvency, Leverage and Liquidity
The group estimates its solvency coverage ratio as at 30 September 2022 to be between 235-240%, up at least 23 percentage points from its half year position (212%). It said group liquidity also remained strong, with around £2.3bn of available cash in addition to the "large amount of cash and gilts" held by its annuity portfolio.
L&G Group chief executive Sir Nigel Wilson said: "Our businesses are resilient, and we are on track to deliver good growth in key financial metrics for FY 2022. Rising interest rates are having a positive impact on demand for PRT, and on our EPS and solvency coverage ratio.
"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."