So a lot for the insurers’ Brexit dividend. The overhaul of EU solvency guidelines was anticipated to unencumber tens of billions of kilos. But the most recent proposals may harm corporations reminiscent of 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 will unlock capital to put money into levelling-up tasks, infrastructure and inexperienced property. 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 principles would have a unfavourable impression on L&G’s solvency ratio of 5 share factors, in accordance with UBS. It is especially affected due to its giant annuity enterprise.
To make 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 stated it might return £4.75bn to buyers.
L&G may use its extra capability to tackle extra bulk annuities, given elevated demand. Pension deficits fall as rates of interest rise, making it simpler for corporations to switch the dangers.
Caution is so as. A recession would carry rates of interest — and the solvency ratio — again down. It may additionally end in 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 beneath their 10-year common.
The inventory has not too long ago 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 giant annuity enterprise means it has a better publicity than friends to credit score threat. In a extremely dangerous downturn, its shareholders would then have to take cowl.
City Bulletin is a each day City of London briefing delivered on to your inbox because the market opens. Click right here to obtain it 5 days per week.