Insurance giant Legal & General has sought to reassure investors over its financial strength after suffering hefty share falls amid the mini-budget market turmoil that left some pension funds across the industry on the brink of collapse.
The group said its balance sheet remains “robust” and that full-year earnings are on track, adding that the fall-out from Chancellor Kwasi Kwarteng’s mini-budget has had a “limited economic impact” on its businesses.
It said the market chaos that caused the pound to plunge to a record low against the dollar and sent gilt yields soaring had caused “challenges” for the pension fund clients and counterparties of its LGIM UK Liability Driven Investment (LDI) business.
But it said the Bank of England’s emergency gilt-buying programme last Wednesday had “helped to alleviate the pressure on our clients”.
“We are continuing to work closely with them to achieve appropriate hedging levels in their portfolios,” it said.
L&G’s shares tumbled as the full scale of the pension fund woes emerged last week, closing 13% below pre-mini-budget levels on Monday despite seeing gains on the day.
Shares rallied by 6% on Tuesday after its update.
The market chaos had forced pension funds to sell government bonds to head off worries over their solvency, but this was threatening to see them suffer severe losses and was creating a downward spiral in gilt prices as more were offloaded.
Investment banks made calls on so-called liability driven investment (LDI) funds, which in turn called on pension funds, which were forced into fire sales of gilts, driving prices still lower and yields higher.
The Bank stepped in with a £65 billion gilt-buying programme that immediately saw yields start to fall back.
There had been worries over L&G’s annuity business and its exposure to LDI investment strategies used by pension funds, given that its asset management arm, LGIM, is among the biggest providers of LDI products in the UK.
But L&G sought to reassure investors over both parts of the business.
On annuities it said: “Despite volatile markets, the group’s annuity portfolio has not experienced any difficulty in meeting collateral calls and we have not been forced sellers of gilts or bonds.”
It said the group expects to deliver 2022 operating profit growth in line with the 8% growth delivered in the first half, while capital generation is set to come in at £1.8 billion.
Group chief executive Sir Nigel Wilson said: “Our businesses are resilient, and we are on track to deliver good growth in key financial metrics for full-year 2022.”
He added: “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.”
Philip Kett, an analyst at Jefferies, said L&G’s update showed its balance sheet remains resilient in spite of the market volatility.
He added: “L&G can post a variety of different types of assets as collateral, including non-sterling assets, if necessary.
“This is an important difference with most pension funds, which post cash as collateral.”