So a lot for the insurers’ Brexit dividend. The overhaul of EU solvency guidelines was anticipated to liberate tens of billions of kilos. But the newest proposals might harm firms resembling FTSE 100-listed L&G, which revealed a powerful set of interim outcomes on Tuesday.
L&G boss Nigel Wilson has been lobbying for an overhaul of the Solvency II guidelines that might unlock capital to spend money on levelling-up initiatives, infrastructure and inexperienced belongings. Less than half of the L&G annuity portfolio is at current invested within the UK. He desires that to extend.
But as issues stand, the revision of the foundations would have a damaging impression on L&G’s solvency ratio of 5 proportion factors, in response to UBS. It is especially affected due to its massive annuity enterprise.
To be certain, that hit wouldn’t be enormous. Higher rates of interest have pushed up the ratio by 5 occasions that this yr to 212 per cent in June, although it has fallen barely since then.
Insurers’ solvency ratios are excessive sufficient for them to think about M&A, deleveraging and rising returns to shareholders. Aviva earlier this yr mentioned it will return £4.75bn to traders.
L&G might use its extra capability to tackle extra bulk annuities, given elevated demand. Pension deficits fall as rates of interest rise, making it simpler for firms to switch the dangers.
Caution is so as. A recession would carry rates of interest — and the solvency ratio — again down. It may also lead to defaults and downgrades in L&G’s annuity guide. Concern about credit score threat has weighed on the shares, which underperformed most of this yr in contrast with the European sector. The shares, on a worth/earnings ratio of 8, sit a fifth under their 10-year common.
The inventory has just lately caught up with European friends, helped by an encouraging replace final month. The firm on Tuesday sought to reassure markets about its credit score threat, emphasising the prime quality of its bond portfolio. Fair sufficient, however L&G’s massive annuity enterprise means it has a better publicity than friends to credit score threat. In a very unhealthy downturn, its shareholders would then have to take cowl.
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