With the UK’s formal withdrawal from the European Union drawing near, insurance firms will need a decent capital buffer to cushion the potential hit to their businesses.
The government has set an end-of-March deadline for triggering Article 50, which will kick off the two-year Brexit process.
Insurance giant Prudential plc (LON:PRU) today acknowledged the uncertainties that Brexit brings to the economic outlook and has boosted its capital reserves to shield the business against any impact it may have on its UK division.
“The vote in favour of the UK leaving the EU will have political, legal and economic ramifications for both the UK and the EU, although these are expected to be more pronounced for the UK,” Prudential said in a statement alongside its full year results.
“The group has several UK domiciled operations, including Prudential UK and M&G, and these may be impacted by a UK withdrawal from the EU.”
Prudential said its Solvency II capital – the amount EU insurance companies must hold to reduce the risk of insolvency – rose 29% to a surplus of £12.5bn in 2016 from £9.7bn the previous year. The surplus was equivalent to a cover ratio of 201%, compared to 193% in 2015.
Shore Capital analyst Eammon Flanagan said the Solvency II position is “highly robust” and sets the group apart from the majority of its UK peers.
Aviva...
Like-wise, fellow insurer Aviva plc (LON:AV. bolstered its capital position in 2016 as it restructured the business. Aviva discarded its stake in Dutch insurer Delta Lloyd, exited Russia, the US and Malaysia as well as snapped up Friends Life for £5.6bn.
The Solvency II capital surplus increased 16% to £11.3bn from £9.7bn the prior year. It represented a coverage ratio of 189%, compared to 180% in 2015.
Aviva’s chief executive Mark Wilson said the company plans to return the excess cash to investors.
“The slimming process has helped the group generate plenty of capital this year, exceeding its 150-180% Solvency target,” according to Hargreaves Lansdown.
“News that Aviva is looking to return some of that surplus to shareholders, either through share buybacks or special dividends, is very welcome."
Legal & General...
In contrast Legal & General reported a drop in its solvency ratio, which raised concerns about the potential post-Brexit impact on the insurer.
Given its predominant UK exposure, L&G is one of the more sensitive insurers to any Brexit-related fall-out.
Solvency II coverage ratio slipped to 171%, down from 176% in 2015. The group’s solvency surplus was £5.7bn, compared to £5.5bn the previous year.
Still, this marked an improvment on the solvency ratio of 163% at the first half results and the group’s chief executive Nigel Wilson sounded a confident outlook: “…our core markets are growing, our market share is increasing, our balance sheet is strong and we have positive cash and earnings momentum.”
Panmure Gordon analyst Barrie Cornes said: "The risk of slowing global economic activity remains but the opportunities primarily in the UK and US remain attractive."
Standard Life...
Standard Life, which last week agreed the terms of its £11bn all-share merger with Aberdeen Asset Management, improved its solvency ratio in 2016.
The Solvency II coverage ratio rose 176% from 162% and the surplus climbed to £3.1bn from £2.1bn.
Analysts were impressed by the strength of the group’s balance sheet but some think Standard Life may need it given the risks of its merger with Aberdeen. Standard Life will buy Aberdeen for £3.8bn to create the UK's largest fund manager with assets under management of more than £660bn.
Berenberg said it believes the merger offers “little upside, but substantial risk” following the struggles at Aberdeen, which recorded its 15th consecutive quarterly outflow of assets of £10.5bn in the three months to 31 December.
The merged company is reportedly set to cut 1,000 jobs and make overall savings of about £200mln for Aberdeen.
“We believe that the benefits, if any, rely more on a major change in fortune for Aberdeen’s funds than they do on any cost savings, and the level of disruption that could be caused to Standard Life’s business is high,” Berenberg said.
Berenberg downgraded the stock to ‘hold’ from ‘buy’ and cut the target price to 380p from 400p
Equally, Jefferies was sceptical as it cut its rating to ‘hold’ from ‘buy’ and reiterated a 398p target price. "While the deal is earnings per share accretive, the three-year integration period is likely to be dominated by uncertainty with synergies unlikely to be recognised in the short term.”