- Full year financial targets confirmed
- Solvency II changes welcomed
- Pension risk transfer business booming
Shares in insurance and asset management group Legal & General (LGEN) jumped to the top of the FTSE 100 leader board with a gain of 4% to 264p after the company confirmed its full year earnings guidance.
The firm also commented in depth on its PRT (pension risk transfer) business, its Solvency II position and developments in the LDI (liability-driven investing) market following the disruption caused by the mini-budget.
STRONG TRADING AND A BRIGHT OUTLOOK
Consistent with the estimates it gave at the half-year stage, the company expects to deliver 8% growth in operating for the full year to around £1.16 billion and to generate capital of around £1.8 billion.
Regarding the proposals to reform the legislation around Solvency II, the firm said the changes ‘represent positive progress and will allow us greater flexibility to make appropriate investments, including ones which develop new infrastructure, contribute to the UK Government’s levelling-up agenda, and support positive climate outcomes’.
The group’s Solvency coverage ratio currently stands at between 225% and 230% due to the contribution from higher interest rates and strong capital generation.
Currently half of the assets backing its annuity portfolio are bonds issued by non-UK companies, but the firm predicts the share of UK-based assets will increase following the government’s proposed reforms.
The global PRT business has performed strongly, winning new business in the UK, the US and Canada in recent weeks, and the firm says the global pipeline of pension schemes approaching the insurance market is the busiest it has seen, which bodes well for future deals.
LESSONS LEARNED FROM THE LDI DEBACLE
Concerning the LDI market, Legal & General supports pension funds in the UK, US and Europe but its exposure is small at around 2% of operating profits.
The firms said that although interest rates had risen during the first part of this year, they hadn’t caused its LDI clients major disruption.
However, in the week after the mini-budget in September, 30-year gilt rates jumped more than twice as much as in any week in the last 25 years causing serious liquidity problems for some LDI clients who couldn’t sell assets quickly enough to provide cash collateral.
On a positive note, the chaos which ensued has made LDI clients increase their collateral levels ‘significantly’ while working with their banks to diversify their sources of collateral.
