Legal & General weathers the gilt market storm with profit growth

Legal & General saw revenues drop due to clients’ scramble for cash during the gilts crisis. However, the company reported a 12 percent increase in operating profits last year to PS2.5billion.

The FTSE 100 insurance and pensions group reported a decrease in profits contribution from its investment division from PS422million to PS340million, partly due to the chaos in liability driven investments (LDI). It claimed that it suffered revenue losses due to clients selling more fee-generating products in order to satisfy collateral requirements.

The fall in global asset prices also affected the investment division of Britain, the largest investor in assets. This led to a PS225billion drop in total assets to PS1.196 trillion.

September’s poorly received mini-budget by Liz Truss caused a sell-off of the gilts market. This was further exacerbated by approximately PS1 trillion in LDI positions in defined benefit pension plans. The Gilts market crashed, and the Bank of England intervened with a buying plan to stabilize markets. Pension funds were forced to sell assets in order to pay margin calls on LDI funds.

Legal & General is the largest provider of LDI products. However, it reported that it saw positive LDI flows throughout the year, despite its revenues from pension fund clients falling as they were forced to sell other assets managed by the investment division.

Sir Nigel Wilson, chief executive said that “We have delivered another strong results in 2022, which was ahead of market expectations.” Our highly synergistic and diverse business model continues to bring significant benefits. With a record solvency ratio (236%), our balance sheet is robust and resilient.

He cited capital generation of PS1.8billion, an increase of 10 percent, and a 5 percent increase in total dividend.

He said that the company had also made an excellent start to 2023 and reported a “step up” in traditional pension schemes approaching them for de-risking solutions like buy-outs. “We have strong global pipeline in all our key markets.”

Cala, Cala’s housebuilding business, had sold 200 units and had received 41% of its year-end target. The company stated that although this figure is slightly lower than last year’s outstanding start to the year it was still in line with previous years.

Jefferies analysts, who recommend a “buy” recommendation for the group, stated that operating profits have outperformed consensus expectations by 3%, partially due to a favorable longevity assumption by the company.

The investment management division won in terms of client gains. It attracted a net PS49.6 trillion of new business during the year. 43 percent of this was from international clients.

Wilson announced his resignation from the group in January after serving as its leader for 11 years. Wilson has offered to remain on the job for up to one year, until his successor is chosen.

During a House of Lords inquiry in November, he stated that the blame for the LDI collapse was on the mini-budget which caused a “disproportionate and unprecedented movement” in the gilt markets. This is something we have never seen before.

The shares of the group fell 5p or 1.9 percent to 260 3/4 p during early trading.