REG - Legal & General Grp - Trading Statement

Legal & GeneralAnnouncement

18/11/2022 07:00

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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 £9.3bn of global PRT business
(UK: £7.1bn and International: $2.6bn), which already exceeds the £7.2bn 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 £100-200bn 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  (#_ftn6) 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 £10m 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  (#_ftn7)
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 £4bn 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 (£1.16bn vs
£1.08bn) and FY22 capital generation of £1.8bn.

 

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 £1.3 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 £15.2 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
(https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1118359/Consultation_Response_-_Review_of_Solvency_II_.pdf)

 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 £2.66bn, H1 2022 £1.36bn.

 5  Managing investment and liquidity risk in the current economic climate |
The Pensions Regulator
(https://www.thepensionsregulator.gov.uk/en/document-library/statements/managing-investment-and-liquidity-risk-in-the-current-economic-climate)

 6  This Bank of England speech by Andrew Hauser provides a helpful account of
recent events: Thirteen days in October
(https://www.bankofengland.co.uk/-/media/boe/files/speech/2022/november/thirteen-days-in-october-speech-by-andrew-hauser.pdf?la=en&hash=542C9233D0A0AFF1756935908B8BEF305F102C7F)

 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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