UK financial services group Legal & General (L&G) has reported “limited economic impact” to its business from the financial volatility in the UK over the past few weeks, as well as from wider unstable macro conditions.
Last week, the Bank of England took the unprecedented step of making “urgent” targeted purchases in the gilt market to maintain financial stability following a negative market reaction to new budgetary measures introduced by the UK Government.
Analysts at Goldman Sachs were among those to note that potential collateral calls and sharp moves in interest rates could pressure UK life insurer stocks.
However, Moody’s felt that liquidity buffers should help to limit their impact, and expressed confidence that UK insurers would navigate the gilt volatility.
With some degree of calm now returning to the UK financial markets, Legal & General has confirmed that it has managed to maintain the positive momentum it built over the first half of 2022, and is “continuing to deliver in H2,” with no changes to its full-year operating profit and capital generation forecasts.
Indeed, despite the volatile markets, Legal & General reported that its annuity portfolio has not experienced any difficulty in meeting collateral calls and has not been forced to sell gilts or bonds.
Nevertheless, the speed of interest rate increases has caused “challenges” for pension fund clients and counterparties of Legal & General’s investment arm, the company acknowledged, specifically for UK Liability Driven Investment (LDI) business.
But it added that the Bank of England’s gilt purchase strategy has helped to alleviate this pressure. LGIM acts as an agent between LDI clients and market counterparties and therefore has no balance sheet exposure itself.
“Our businesses are resilient, and we are on track to deliver good growth in key financial metrics for FY 2022,” said Nigel Wilson, Group Chief Executive at Legal & General.
“Rising interest rates are having a positive impact on demand for PRT, and on our EPS and solvency coverage ratio,” he continued. “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.”
In line with the guidance provided at HY, Legal & General continues to expect to deliver full-year operating profit growth in line with the 8% growth delivered in the first half of the year and capital generation of £1.8 billion.
It also expects interest rate increases to continue to have a positive impact on its earnings per share and on its solvency coverage ratio.