Legal & General moves to reassure investors over LDI market turmoil

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

The financial services firm told investors that the “unprecedented” rate of rate hikes had caused problems for pension fund customers and counterparties of its so-called Liability-Driven Investment (LDI) division.

But the Bank of England’s intervention last week has eased these pressures, L&G said, as its annuity portfolio has had no trouble meeting collateral requests, and it has not been forced to offload assets due to adequate capital and liquidity buffers.

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

Chancellor Kwasi Kwarteng’s now infamous ‘mini-budget’, which included plans for unfunded tax cuts, further unsettled LDIs last week as rising gold yields risked collapse of large numbers of UK pension schemes.

But the Bank of England responded with a £65bn bond purchase program to calm government bond markets, a move that L&G said had lowered real interest rates and “helped relieve pressure on our customers.”

Despite ongoing market turmoil, the FTSE 100 insurer noted that demand for global pension risk transfers (PRT) “accelerated” as higher interest rates and wider credit spreads have led to lower funding gaps.

The group’s pensions business has booked PRT volumes of £5.8bn so far this year, after closing two major deals last week.

Among the deals the company closed in 2022 are one valued at more than £2 billion with the British Steel Pension Scheme and one with Rubbermaid, a division of consumer products manufacturer Newell Brands.

L&G said it “maintained the positive momentum of the first half of the year and continues to perform in H2 despite prevailing macro conditions.”

It added: “Volatility has increased significantly in H2, but this has a limited economic impact on our business.”

L&G forecasts full-year corporate profits to grow in line with 8 percent growth in the first half, while capital generation is expected to total £1.8 billion.

Meanwhile, the group estimates its solvency coverage ratio — a company’s availability to meet its long-term debt obligations — to be 235 to 240 percent in September, up 23 percentage points from the end of the first half of the period.

Sir Nigel Wilson, chief executive of L&G, 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 business is highly cash-generating. We will continue to work closely with our customers to support them during this period of increased market volatility.”

Legal & General Group Shares rose 4.8 percent to 232.5 pence mid-morning Tuesday, though their value has fallen by about a quarter this year.