TIDMLGEN
RNS Number : 8336G
Legal & General Group Plc
18 November 2022
Legal & General Group Plc
18 November 2022
Legal & General: Market update
Legal & General Group Plc ("Legal & General" or the
"Group") notes the Chancellor's references in yesterday's Autumn
Statement to Solvency II reform. We believe the proposals represent
a positive step forward. We also provide an update on PRT (Pension
Risk Transfer) new business written year to date and further detail
on LDI (Liability Driven Investing). Finally, the Group reiterates
its ambition to deliver full year operating profit growth and
capital generation in line with the guidance given at the interim
results.
Solvency II: a strong position bolstered by positive proposed
reforms
The Group welcomes the Chancellor's references in yesterday's
Autumn Statement to Solvency II reform. We believe the proposals,
as outlined in the corresponding policy document [1] , 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. We welcome the
primary proposals to: reduce the risk margin for long-term life
insurance business by 65%, maintain the existing methodology and
calibration of the fundamental spread, and broaden the matching
adjustment eligibility criteria to include assets with highly
predictable (as opposed to fixed) cashflows . We welcome the
inclusion of these reforms as part of the Government's reform
programme to financial services regulation, through the Financial
Services & Markets Bill process, which we anticipate will be
during the first half of 2023.
The Group estimates its Solvency coverage ratio as at 11(th)
November 2022 to be between 225-230%, principally reflecting the
contribution from higher interest rates and strong ongoing
operational surplus generation (FY21: 187%). We expect the reform
to the risk margin to increase the Group's solvency ratio by 3-4
percentage points. Currently, approximately half of the assets
backing our annuity portfolio are bonds issued by companies that
are not based in the UK. We would expect the percentage of UK-based
assets backing our UK annuity portfolio to increase following the
implementation of these reforms.
PRT: continuing to perform strongly in an attractive and growing
global market
Our global PRT business has continued to perform strongly,
securing new business wins in each of the UK, US and Canada in the
last few weeks. Year-to-date, LGRI (Legal & General Retirement
Institutional) has transacted or is in exclusive negotiations on
GBP9.3bn of global PRT business (UK: GBP7.1bn and International:
$2.6bn), which already exceeds the GBP7.2bn of global PRT secured
in 2021.
There has been a step-up in the number of pension schemes
approaching the insurance market and the global pipeline into 2023
is the busiest we have seen. Indeed, LCP anticipate GBP100-200bn of
UK PRT demand over the next three years. ([2])
We are on track to deliver another strong PRT result this year
and a record year for our international PRT business. We have
continued to source high quality assets at attractive yields
throughout the second half of the year. These assets have been used
both to increase the overall yield on our backbook as well as to
secure the recent new business. PRT volumes have been secured at
margins and capital strain that are in line with our long-term
average.
Our UK annuity portfolio has continued to be highly resilient to
market moves and has not experienced any difficulty in meeting
collateral calls. Positioning remains defensive with approximately
10% of the portfolio held in cash and high-quality government
bonds, with no material changes to the investment or liquidity
management strategy anticipated in the near future. We expect the
portfolio to be self-sustaining again in 2022.
LDI: a liquidity challenge in the UK prompted by a rapid
increase in interest rates
Legal & General Investment Management (LGIM) has for many
years supported pension funds with a variety of solutions,
including LDI, and continues to do so.[3] We earn on average 2-4bps
fee margin on LDI assets under management. We implement LDI
business for clients in the UK, US and Europe. UK LDI is expected
to be around c2% of our Group divisional operating profit in 2022
as it was in 2021.[4]
LDI enables pension funds to match movements in pension assets
with liabilities, whilst freeing up capital to invest in growth
assets. LDI has played a critical role in helping Defined Benefit
(DB) pension funds to reduce their pension deficits. As the UK
Pensions Regulator noted recently: "Over the past twenty years, as
long-term interest rates fell to historically low levels and
through market events seen through the COVID-19 pandemic, LDI has
meant that the assets in DB schemes increased. During that period,
LDI also played a significant role in helping to manage the
affordability of DB schemes for employers."[5]
LGIM has worked closely with its LDI clients to support them
through the recent period of severe market volatility, which
catalysed a sharp and extreme rise in interest rates. Interest
rates had been increasing throughout 2022 in most major western
markets. In the UK, between the beginning of the year and 16(th)
September (just prior to the mini-Budget) 30-year gilt rates
increased by 230 basis points. This had not caused significant
disruption for UK LDI clients. However, in the week of and
following the mini-Budget, 30-year gilt rates increased rapidly by
a further 150 basis points before the Bank of England stepped in to
provide support to the gilt market. [6] This sharp and extreme
increase in gilt yields, which materially increased the collateral
required by banks from LDI funds, was more than twice the level
seen over any week in the last 25 years. This caused liquidity
problems for some LDI clients who had assets available but could
not access them in time to provide cash collateral.
The extreme volatility in the UK gilt market following the
mini-Budget has highlighted the need for technical changes to
ensure the smooth functioning of both LDI and the government's
financing of its debt. Clients who have implemented LDI have now
significantly increased collateralisation levels. In addition, LDI
providers are working closely with banks to further enhance and
diversify sources of collateral.
Recent events have highlighted to DB pension funds the value of
holding additional scheme assets with their LDI provider, enabling
easier access to liquidity. We are well positioned to benefit from
any potential consolidation of pension scheme assets, given our
range of investment capabilities. LGIM acts as an agent between our
LDI clients, their trustees, advisers, and market counterparties
(banks) and therefore has no balance sheet exposure.
We have experienced positive flows into LDI over the course of
2022. However, DB flow-related revenue has decreased as higher fee
products have been sold to meet collateral requests. We expect DB
flow-related annual revenue and profits to reduce by around GBP10m
in 2022 as a result. More generally, and as we signalled at the
interim results, rising interest rates have reduced LGIM's assets
under management in fixed income and solutions strategies, with a
consequent reduction in revenue.
As noted by market commentators, a positive consequence of
rising interest rates is that many UK DB clients are now in a
position where they have, or are very close to having, a surplus in
their pension schemes. [7] Consequently, Legal & General is
actively engaging with many of these schemes on PRT. We are seeing
similar trends in international PRT markets.
Accelerating international growth
In addition to our success in International PRT, we recently
announced our first two US real estate asset origination projects
through our newly formed joint venture, Ancora L&G. We have a
well-established model of investing in Science &
Technology-focused real estate in the UK through our Bruntwood
Scitech Joint Venture (JV). This partnership has an extensive
portfolio, including 2m sq ft already built, and with another 5m sq
ft in development, with universities including Manchester and
Birmingham. We also have a GBP4bn JV with the University of Oxford.
We are now replicating our successful UK SciTech model in the
US.
Marking the first acquisition for the new partnership, Ancora
L&G has acquired 387 Technology Circle NW, a 128,000 sq ft
Class A life science/lab building in the Science Square Innovation
District adjacent to Georgia Institute of Technology's
(GeorgiaTech) campus in Atlanta, Georgia.
Ancora L&G has also been selected as the preferred developer
by the State of Rhode Island to develop a new Rhode Island
Department of Health Public State Lab in downtown Providence. The
80,000 sq ft state-of-the-art laboratory will sit within a building
totalling 210,000 sq ft. Brown University has signed a letter of
intent to lease 20,000 sq ft of the remaining private laboratory
space.
Expectations for FY22 operating profit and capital generation
unchanged
Consistent with the guidance provided at HY22, we expect to
deliver resilient FY22 operating profit growth in line with the 8%
delivered in H1 (GBP1.16bn vs GBP1.08bn) and FY22 capital
generation of GBP1.8bn.
About Legal & General
Notes to editors
Established in 1836, Legal & General is one of the UK's
leading financial services groups and a major global investor, with
around GBP1.3 trillion in total assets under management (as at H1
2022) of which a third is international. We also provide powerful
asset origination capabilities. Together, these underpin our
leading retirement and protection solutions: we are a leading
international player in pension risk transfer, in UK and US life
insurance, and in UK workplace pensions and retirement income.
Through inclusive capitalism, we aim to build a better society by
investing in long-term assets that benefit everyone. As at 17
November 2022, Legal & General has a market capitalisation of
GBP15.2 billion.
Forward looking statements
This announcement may contain certain forward-looking statements
relating to Legal & General, its plans and its current goals
and expectations relating to future financial condition,
performance and results. By their nature, forward-looking
statements involve uncertainty because they relate to future events
and circumstances which are beyond Legal & General's control,
including, among others, UK domestic and global economic and
business conditions, market-related risks such as fluctuations in
interest rates and exchange rates, the policies and actions of
regulatory and Governmental authorities, the impact of competition,
the timing impact of these events and other uncertainties of future
acquisitions or combinations within relevant industries. As a
result, Legal & General's actual future condition, performance
and results may differ materially from the plans, goals and
expectations set out in these forward-looking statements and
persons reading this announcement should not place reliance on
forward-looking statements. These forward-looking statements are
made only as at the date on which such statements are made and
Legal & General does not undertake to update forward-looking
statements contained in this announcement or any other
forward-looking statement it may make.
Further information
Investors:
Edward Houghton Group Strategy and Investor Relations Director
+44 (0)203 124 2091
Nim Ilankovan Investor Relations Director +44 (0)203 124
2054
Blake Carr Investor Relations Director +1 240 397 0053
Media:
Graeme Wilson Tulchan Communications +44 (0)207 353 4200
[1] HM Treasury: Review of Solvency II: Consultation -
Response
[2] Lane Clark & Peacock: "Insurance enters a new phase: a
skyrocketing market", October 2022.
[3] PMC (the entity which primarily manages the LDI business) is
regulated by the PRA; LGIMH (the Holdco) is regulated by the FCA.
79% of LDI assets under management are segregated; 21% pooled (as
at end-Oct 2022).
[4] Group divisional operating profit in 2021 GBP2.66bn, H1 2022
GBP1.36bn.
[5] Managing investment and liquidity risk in the current
economic climate | The Pensions Regulator
[6] This Bank of England speech by Andrew Hauser provides a
helpful account of recent events: Thirteen days in October
[7] The UK DB scheme buy-out funding ratio, which has averaged
63% for the last 15 years, has increased significantly in 2022.
Source: Payment Protection Fund, Purple Book, 2021 . Lane Clark
& Peacock (LCP) estimates the average scheme is 88% funded
against their buy-out measure at 30 Sep 2022 ("Insurance enters a
new phase: a skyrocketing market", October 2022); PWC estimates UK
DB pension schemes have already moved into a surplus position on a
buyout basis at a 113% funding ratio (PWC Buyout Index, October
2022).
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