The market has reacted positively to Legal & General’s statement earlier this morning. Shares in the insurer are currently trading up 10 per cent – having taken a bashing on Monday and last week on persistent rumours of capital trouble.
Indeed the London analyst community declared it self to be broadly impressed. Oriel took it as “implicit” in the announcement that “they plan to pay the final dividend,” adding: “The share price moves of the last few days look excessive.” Cazenove agreed: “The cost of a 4.26p final dividend is £253m, which is comfortably affordable in the context of the £1.6bn surplus.”
But the statement was hardly good news. L&G’s IGD Capital surplus was reported at £1.6bn. It was formerly £2.9bn. And Deutsche bank last week reported an L&G IGD surplus target of £3bn.
It’s not immediately clear – ruling out capital raising, as L&G’s CEO, Tim Breedon, did this morning – from where the shortfall will be made up.
Of course, It’s hardly surprising that L&G has had a rough ride. Markets throughout Q4 were punishing, and insurers, who are naturally heavily exposed to both equities and bonds, have fared accordingly. Although the industry is spared from having to aggressively mark its books to market, given the coming default cycle it does have to worry about its fixed income holdings.
And indeed, an extra £650m in default provisioning was the keystone of Tuesday’s announcement (emphasis ours):
As at December 31st 2008, we estimate our IGD* capital surplus was in excess of £1.6bn.
This reflects falls in equity markets to 31st December 2008, the credit default reserving detailed below, and our current view of other year-end adjustments (an assessment of which is ongoing), but is before accrual of the final dividend.Assigning £650m of the £1.3bn hit to IGD, we’re left with another £650m – attributable, per the above, to “falls in equity markets” and “other year-end adjustments”. Caz analysts make an interesting point:
Given c10% equity falls in Q4, and the £650m pretax default reserve additionm, we would have expected a December figure of c£2.1bn given the Q3 IMS sensitivities.
In other words, given what was already stated by L&G about the sensitivity of their IGD surplus to the equity markets, a £150m loss can be assumed on a 10 per cent fall in Q4, which when looking at todays reported IGD of £1.6bn… leaves £500m unaccounted for.
Or rather, £500m attributable to those vague “other year-end adjustments.” A crucial point being that the assessment of those adjustments is ongoing.
Related links:
L&G reassures over capital strength – FT
SELL: Insurers – FT Alphaville
Life insurers: terrible bond investors – FT Alphaville