L&G Solvency II concerns overdone, says Deutsche Bank
Concerns over insurance giant Legal and General’s capital buffers are overdone, according to analysts at Deutsche Bank.
The FTSE 100 manager of UK pensions, which announced an annual profit of £1.09bn this week, said it had a solvency capital ratio of 169% on Tuesday.
But the level was below the 180% forecast by some analysts, including those at J.P. Morgan who said it showed a weaker capital position compared to Aviva, Prudential and Standard Life.
Solvency II is an EU directive that codifies and harmonises the EU insurance regulation.
Primarily it concerns the amount of capital that EU insurance companies must hold to reduce the risk of insolvency.
Shares in Legal & General declined yesterday after the statement and are down 13% since the start of 2016, priced at 231p apiece.
But Deutsche Bank equity analyst Oliver Steel downplayed the concerns.
“Undoubtedly, the market’s negative reaction to the results is down to the group’s Solvency II disclosure," he said in a note to clients.
"At 169%, the stated number was actually in line with our estimate – though clearly below some. But news that it had briefly fallen to 158% in mid-February was taken poorly.
"Our sense though is that the shares have fallen too far. There are no immediate positive catalysts; but we see little in the solvency ratio that alters the business model - let alone requires additional capital."
Stone, who has a ‘buy’ rating on L&G shares with a target price of 298p, says the firm is among the best in its peer group.
"L&G has a no.1 position in UK protection, a leading global fund management business and no.1 or 2 position in bulk annuities - each accounting for 30% of its cash flows."
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