Following the UK Brexit vote, Legal & General has updated the market on its balance sheet strength and specifically its Solvency II ratio, credit portfolio, derisking actions and providing cash generation guidance for the half year.
The insurer said its Solvency II surplus is approximately £4.9bn and it expects its net cash for half year 2016 to be up 15%. It added that it runs an ‘A minus’ rated credit portfolio of £44.8bn.
Legal & General said its central planning scenario, ahead of the referendum, was for a 50-50 probability of a vote for the UK to leave.
The insurer said: "We positioned our balance sheet accordingly to reduce risk for our customers and shareholders. We undertook a number of derisking actions in respect of our asset portfolios, including the traded equities held within our shareholder funds, before the Referendum to mitigate our balance sheet against the downside risk of a "leave" vote."
Regulatory capital balance sheet
L&G said it estimates, based on market conditions at 4:30pm on 27 June 2016, the group’s Solvency II coverage ratio (PRA basis) was c.156% with eligible own funds of c.£13.7bn, a solvency capital requirement (SCR) of c.£8.8bn and hence a surplus of c.£4.9bn.
The insurer said its year-end 2015 Solvency II balance sheet (PRA basis) had a coverage ratio of 169% with eligible own funds of £13.5bn and a SCR of £8bn resulting in a surplus of £5.5bn.
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According to L&G, changes in the first half of 2016 include the payment of the 2015 final dividend of £592m reduced the coverage ratio by c.7% points and the acquisition of the £2.9bn UK annuity portfolio from Aegon reduced surplus by c.£50m and the coverage ratio by c.3% points.
The increase in the SCR from year-end 2015 has largely been driven by the fall in risk free rates.
Overall, L&G said its Solvency II balance sheet has demonstrated its resilience to market volatility, including that caused to date by the EU Referendum outcome.
L&G said its global credit team keeps its portfolios under continuous review and in recent months has actively de-risked the credit component of eligible own funds as well as Legal & General Retirement’s £44.8bn. ‘A minus’ rated bond portfolio.
This has included selling sub-investment grade credit and reducing its exposure to European banks’ subordinated debt.
L&G said the portfolio is well diversified by sector and by geography.
Bank holdings represented 4.9% of the LGR bond portfolio as at 31 May 2016, with very limited exposure to either Tier 1 or sub-investment grade.
L&G stated that executing a clear and focused strategy is based on five key long term growth drivers: Ageing populations; globalisation of asset markets; creation of new real assets; and welfare reform and digital.
The insurer said: "This strategy is resilient and we see these trends as substantially unaffected by the EU Referendum result."