L&G’s chief executive has warned that the UK risks losing prized investment to the US if an overhaul of insurance rules does not go far enough, potentially undermining post-Brexit efforts to draw tens of billions of pounds into British infrastructure.
Ministers have promised that radical changes being consulted on for Solvency II, a set of rules inherited from the EU, would unlock large sums for areas such as UK green energy, as part of an “investment big bang”.
But insurers have warned that any investment book could be limited by aspects of the reform pushed for by the Prudential Regulation Authority, the regulator working with the Treasury on the shake-up.
Days of political turmoil have fed uncertainty about the overhaul. It has been championed by two cabinet members — chancellor Rishi Sunak and City minister John Glen — who resigned this week, paving the way for prime minister Boris Johnson’s announcement that he was stepping down.
Speaking to the Financial Times on Thursday, L&G’s chief executive Nigel Wilson questioned whether freed-up investment would indeed reach UK projects. It “will go into non-UK assets if they are not careful,” he said.
“The issue is do we invest in America or do we invest in the UK?” he added. Wilson cited the “whole raft” of assets in the US that are structured for institutional investors, such as apartment blocks. Forty per cent of the assets backing its UK annuity liabilities were non-UK, he said.
“The asset opportunity is international, we’ve got to decide if we want to be part of that,” he added.
L&G wants a change to the rules to allow investments with highly predictable but not fixed cash flows to be permitted within a key part of the Solvency II framework, and thus benefit from a lighter capital treatment.
The Treasury’s consultation on changes to the Solvency II regime announced in April has been touted as the first big break between UK and EU financial rules since Brexit.
The aim is to enable life insurers to redeploy as much as 15 per cent of the overall capital they currently set aside, according to the government. That would equate to about £18bn based on data from the end of 2020, which could be redeployed to boost long-term investments. Policymakers also intend to widen the range of assets where insurers can invest under the regime.
However, some other insurers have also raised objections to some of the changes wanted by the PRA, which they argue will limit the benefits for the industry and how much it will be able to reinvest.
“What the PRA is proposing makes these types of investments less attractive overall, which means that less will be going into UK infrastructure but the money that we do get will go into the US,” said one insurance executive, speaking on condition of anonymity. Availability of investable projects was also a barrier, the person added.
L&G’s share price rose almost 3 per cent on Thursday, more than the wider blue-chip stock index, after it posted a trading update in line with market expectations. L&G highlighted £4.5bn of risk transfer deals done in the first half, compared with £3.1bn in the previous comparable period, and strong investment management inflows. It said it expected to post double-digit growth in cash and capital generation in its interim results next month.
Jefferies analysts said the update was “particularly reassuring”, highlighting a Solvency II ratio — a measure of the company’s regulatory capital against the minimum required under the rules — estimated at 215 per cent at the end of June, up from 187 per cent at year-end. Rising interest rates were a key factor for the improvement.