Current financial and capital market conditions put L&G in a strong position, according to a new report by RBC Capital Markets.
L&G has benefited greatly from rate rises, and its Solvency II ratio is likely to improve as a result.
RBC forecasts that due to market movements year-to-date, its surplus capital has increased by £1.5 billion, and its 2022 year-end Solvency II ratio will be 221% (compared with 187% in 2021).
As a result L&G is able to return £1 billion of surplus capital to shareholders (7% of its market cap) and fund additional growth.
The underlying capital generation profile of the company is self-sufficient, as operational surplus generation more than offsets new business strain and dividends.
The company says it will use these market-related surplus capital improvements to: fund additional growth in bulk annuities, provide a buffer against potential adverse economic developments, and return the remainder to shareholders.
RBC estimates that in a recessionary scenario of falling rates, mass credit downgrades, along with falling equity and property markets, there would be a 30pp hit to its capital ratio. The company’s post-capital return SII ratio of 200% would provide further protection in that scenario.
L&G’s share price has fallen 19% year-to-date, making it by far the worst performer in the sector, which the company says is inconsistent with its capital position having improved by the most over the same period.
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