The tiny violins are being played furiously on the FT’s Lex column and they are being played for the shareholders of bulk annuity providers L&G and Just, whose share prices have flatlined despite a huge surge in their bulk annuity books.
It seems that the markets are unimpressed by their success in swallowing DB pension schemes through “buy-out” and by price-fixing future buy-outs by “buy-ins”.
Just Group’s low valuation has, in part, reflected unambitious targets for return on equity. Handily beating its new, over-12 per cent goal on Friday sent the shares up 13 per cent. But earning the trust of the market will require sustainable earnings growth. Just Group will need to work hard to find sufficient investment returns to match the ample supply of bulk deals on offer.
Here I think is an example of the conflict that equity markets are having with insurance.
The insurance of defined benefit pension schemes involves reserving for future liabilities under Solvency II. There are an army of actuaries who understand this but very few outside that profession who have a clue about concepts such as the “matching adjustment”. What the markets see is the assets of occupational pension schemes being made ready for buy-out by insurers by selling off equities and illiquid assets (often at a discount) and buying bonds. This is the advice they are getting , knowing that insurers will accept their bonds but not their real assets.
This is not a process much enjoyed by the markets. It would seem that they are unimpressed and are not giving insurers much credit for their new business in their share price valuations
Just trades at a 60 per cent discount to book value. Its life insurance peers are closer to parity.
A sound strategist sitting within the Just group might conclude that an over-reliance on annuity business might not be a good thing. Bothering occupational schemes with buy-outs and buy-ins may show well on the balance sheet but it’s not being rewarded in the share price.
There are other things that life companies can do , like growing their “life book”, the “with-profit” end of things where investment is in real assets which invest productively as this country needs. Simply piling up the paper issuance in corporate bonds isn’t doing much for productivity and its not doing much for shareholders either.
Just and L&G are both great British businesses that are trying hard for their shareholders, sadly they are not getting recognition for their efforts. Taking a step back , they may see that the Aladdin’s Cave of opportunity – presented by occupational DB schemes – is not quite the treasure chest it seemed.