Note: These are Gordon Aiken’s personal views and do not constitute investment advice. See full disclaimer below.

In football, there comes a point where a team stops trying to score and simply parks the bus. All eleven players are behind the ball, the penalty area is crowded, and every attack is snuffed out before it starts. It is secure, but it is not much fun to watch, and you will never win the league by playing like that every week.

UK bulk annuity writers feel similar today. Solvency ratios are extremely strong, yet share prices still behave as if a defensive collapse is just around the corner. The latest firm level results from the PRA’s LIST 2025 stress test suggest the opposite. Balance sheets can absorb a very severe recession style shock, and in my view the sector has now parked the bus on solvency to the point where capital is working too hard for too little return.

This note looks at what the firm specific LIST 2025 results tell us about individual companies, how to interpret big movements in solvency coverage, and why investors should now focus much more on returns on capital and much less on headline solvency percentages

A quick recap, and a link for the detail

LIST 2025 is the PRA’s biennial life insurance stress test, this time under the new Solvency UK regime, aimed squarely at the bulk annuity market. The core scenario is a three-stage stress that combines:

• Falling risk-free rates
• Sharp falls in equity and property values
• Widening credit spreads followed by downgrades and defaults

Calibrated broadly to a one in one hundred style event, it sits in the same ballpark as the worst year of the global financial crisis.

At sector level, the aggregate SCR coverage ratio falls from 185% to 154%, with all firms remaining above 100%. I covered the scenario design, the overall movements and the initial market reaction in last week’s note, so I will not repeat that here. You can find that overview in UK life insurers just passed a real world exam, which is the natural companion to this piece.

This note focuses on what the new firm level disclosures add.

What the firm results actually show

The PRA has now published starting and post-stress SCR coverage ratios for each major bulk annuity writer, together with the movements across the three stress stages and the post action outcome.

This chart shows that group solvency remains comfortably above stressed solo levels for every major bulk annuity writer. The dark segment is the post-stress solo SCR from LIST 2025, the middle segment is the uplift from that stress to the reported solo SCR at 31 December 2024, and the light segment is the further uplift from solo to group solvency at the same date. Even the lowest group ratio, Phoenix at 172%, sits well above 100%, while Rothesay is at 264%, underlining how much additional protection sits above the already severe PRA stress.

Two things are immediately obvious.

First, everyone remains comfortably solvent. Even after the full three stage stress and the PRA’s standard set of management actions, all firms stay above 120% coverage, and several are well above 150%.

Second, there is meaningful dispersion in both starting levels and movements. A few firms begin with ratios well above 200% and still sit at the top of the range after stress. Others start closer to 150% and fall a little further in the scenario.

The temptation is to treat this as a league table and simply rank firms from most to least resilient on the post-stress percentage. In my view that is precisely the wrong way to read the results.

Why a bigger fall in SCR ratio is not automatically bad

A lot of the early commentary has fixated on percentage point falls in SCR coverage. On that lens, firms that show smaller movements look “better” and firms with larger movements look “worse”. That interpretation misses an important point.

A larger fall in the ratio often means the firm is retaining more risk itself, rather than passing it to a reinsurer.

Consider two simplified examples.

• Insurer A writes a bulk annuity and reinsures a large share of the asset and longevity risk. Its headline solvency ratio stays very strong in a stress, but only because a reinsurer is absorbing part of the pain. The cost of that reinsurance is a permanent drag on future profits.
• Insurer B keeps more of the risk. Its SCR ratio moves more in the stress, because more of the shocks hit its own balance sheet. However, it has not given away as much value in reinsurance margins, so the underlying annuity business is likely to be more profitable.

LIST 2025 cannot tell you which strategy is “right” for every firm in every situation. What it can show is that strong movement in the ratio is not the same thing as weakness. In many cases it simply reflects a deliberate choice to retain risk on a very strong capital base.

This is particularly relevant for firms like Just Group, which historically had to de-risk heavily and focus on headline solvency improvement when its capital position was under pressure in the late 2010s. Over time it has used more reinsurance and other risk transfer tools than some peers. That history goes a long way to explaining why its LIST movement profile looks different from the large listed composite writers today.

By contrast, the very largest writers in the pension risk transfer market, notably Rothesay, PIC and Legal & General, have long targeted high solvency ratios. One reason is straightforward. If a £10bn scheme comes to market, a sponsor and its trustees want to see clearly that the insurer can swallow the deal and still be sitting on a comfortable capital buffer. Maintaining high ratios is therefore as much about commercial positioning and deal capacity as it is about risk appetite.

My conclusion is that the firm level results are consistent with different business models and histories, rather than a simple ranking of “good” and “bad” risk takers.

With-profits, headline ratios and what really matters for shareholders

Several of the firms in LIST 2025 have large with-profits funds, notably Aviva, Phoenix’s Standard Life business and M&G. Under Solvency UK rules, with-profits surplus is often ring fenced. It supports the with-profits policyholders, but cannot be freely used to back annuities or other shareholder business.

This creates an important distinction between:

• The regulatory view of the SCR ratio, which includes with-profits business
• The shareholder view, which looks at capital available to support shareholder backed lines such as bulk annuities

In their own Solvency and Financial Condition Reports, firms often distinguish between three perspectives on solvency, a with-profits fund view, a shareholder view and a combined regulatory view. The with-profits fund view looks only at the ring-fenced with-profits fund. The shareholder view looks only at shareholder backed business, for example annuities, non-profit protection, unit linked and asset management. The combined regulatory view then brings these together, but applies strict rules on how much of the with-profits surplus can count as eligible own funds for the group as a whole.

The chart below from M&G’s HY 2025 disclosure shows how different those perspectives can be. On a shareholder view, M&G reports a solvency ratio of 230%, reflecting only shareholder own funds and SCR. On a with-profits fund view the ring-fenced with-profits surplus supports a ratio of 303%. On the combined regulatory view, the two balance sheets are brought together and the ratio falls to 170%, because most of the with-profits surplus cannot be treated as freely available group capital. The message is that a large with-profits book can mechanically pull down the headline regulatory solvency ratio, even when the underlying shareholder balance sheet is very strongly capitalised.

Source: M&G 2025 Interim results

A similar adjustment is needed when comparing LIST 2025 firm results. Headline ratios for Aviva, Standard Life and M&G are pulled down by the presence of with-profits funds, which are not there to absorb annuity stress. If you notionally removed the with-profits surplus from both own funds and SCR, the implied shareholder SCR ratios would be materially higher (see the chart below). That would place these firms much closer to the other bulk annuity specialists in the exercise.

For investors, the key message is simple. Do not over interpret low headline SCR ratios where with-profits is large. Focus instead on the capital position of the shareholder backed balance sheet, which is what LIST is really testing.

Solo entities versus groups, and why group ratios are higher

The LIST results are published on a solo life entity basis, for example Legal and General Assurance Society rather than the full Legal & General Group. In contrast, the solvency ratios that companies highlight to equity investors are usually group ratios.

Group ratios are generally higher than the solo life entities for several reasons.

• Groups often hold additional capital at holding company level, either as a buffer or to support non-life subsidiaries and asset management businesses.
• Diversification across different geographies and product lines can reduce the aggregate group SCR relative to the sum of solo requirements.
• Certain items, such as unregulated holding company cash or undrawn debt capacity, are recognised at group level but not within the solo life entity.

The result is that group solvency coverage ratios are often materially above the equivalent solo life numbers (see chart below). That means the already comfortable post-stress solo ratios in LIST 2025 actually sit on top of even stronger group capital positions.

From an equity perspective, LIST 2025 therefore understates the true headroom that listed groups have to absorb shocks or deploy capital into new business.

How strong is 154% really, in probability terms

There is another dimension that is easily lost when investors look at solvency ratios as simple percentages.

Under Solvency II and Solvency UK, a 100% SCR coverage ratio is designed to withstand a one in 200 year loss event, which equates to a 0.5% probability of ruin over one year. The capital requirement is therefore calibrated to a very remote tail event.

If a firm runs at 200% coverage, it is holding twice the required capital for that one in 200 event. The relationship is not as simple as “one in 200 squared”, but on any reasonable assumption about the loss distribution, the probability of burning through that extra 100% of capital is orders of magnitude smaller than 0.5%. You are well into territory where the relevant events are multiple crises compounded, rather than a single global financial crisis type shock.

The PRA itself notes that the LIST scenario, which includes interest rate falls, equity and property crashes and a severe credit cycle, is broadly in the one in 100 range. Even under that sort of shock, the sector wide ratio only falls from 185% to 154%. In other words, the industry can withstand something like the global financial crisis and still sit comfortably above a one in 200 standard.

Investors rightly worry about model risk and regime change, and no calibration is perfect. However, the numbers are a useful reminder that running with persistent coverage well above 200% is a very conservative choice. At that point, the marginal benefit of extra capital in terms of solvency protection is very small, while the opportunity cost in terms of forgone returns is very large.

How this squares with share prices

Despite all of this, share prices have not rewarded the LIST 2025 results.

Since the aggregate sector results were published last week, and even after today’s firm level disclosures, market reaction has been muted. From the close on 14 November, just before the PRA release, the FTSE 350 Life Insurance index is down about 1.4%, with the FTSE 100 down by a similar 1.4% over the same period. On the day of the company specific results, the life index is up only about 0.3%, essentially in line with the FTSE 100, and each of the main listed stocks is trading in a very tight range between flat and roughly 0.5% up, rather than showing any decisive positive move in response to the new information.

This is particularly striking given the starting valuation backdrop.

• The main listed UK life insurers still trade on forward dividend yields in the 6-9% range, compared with around 3% for the FTSE 100.
• When I have polled institutional investors, asset risk consistently comes out as the number one concern, ahead of regulatory risk, lack of cash flow and longevity risk.
• LIST 2025 is precisely about those asset risks, especially credit and property, and it shows that even a very severe recession style stress leaves the sector well capitalised.

In other words, the regulator has just provided a detailed, independent answer to the risk that investors say worries them most, yet the market reaction has been apathetic at best.

Some of that apathy may reflect broader equity sentiment, high beta status and concerns about UK macro policy. Some may reflect a view that capital will never be returned, and that high solvency coverage simply means more expensive de-risking or more low return projects.

However, for long-term investors willing to do the work, LIST 2025 strengthens the case that balance sheet risk is not the reason these stocks are cheap.

What investors should focus on next

If we accept that solvency is more than adequate, the logical next question is what management teams will do with that strength.

In my view, investors should:

• Be very relaxed about SCR coverage in the 150% to 200% range, especially for diversified groups with strong cash generation. Coverage well above 200% is a signal that capital is under employed, not that the business is uniquely safe.
• Focus much more on returns on capital, for example the value created by new bulk annuity business relative to capital used, and the sustainability of cash remittances to the holding company.
• Look carefully at reinsurance strategy, especially where heavy use of funded reinsurance or longevity swaps has depressed earnings power in order to support headline ratios. LIST 2025 provides helpful evidence that retaining more risk on strong balance sheets is entirely compatible with regulatory comfort.
• Engage with management on capital return plans, through special dividends and buybacks, where solvency strength is clearly surplus to prudent needs.

From a regulatory perspective, the PRA has now shown that it is willing to publish detailed firm level stress outcomes and to challenge business models openly where it sees systemic risk. That should give investors confidence that genuinely risky models would simply not be allowed to operate in this market for long.

Final thoughts, and a return to parking the bus

Stepping back, LIST 2025 confirms that UK bulk annuity writers have parked the bus on solvency. They have deep defensive lines, spare defenders on the bench and a very conservative game plan. The PRA has just run them through something like a replay of the global financial crisis and the defence has held up.

The question for shareholders is what happens next. Keeping every player behind the ball may feel safe, but it does not win matches. In the same way, running permanently with sector wide coverage north of 185% may feel reassuring, yet it depresses returns on capital and leaves dividend yields stuck in the high single digit range.

In my view, the lesson from LIST 2025 is that the sector can now afford to move a few players out of defence. That means writing profitable new annuity business with less reinsurance, and it means returning genuinely surplus capital through buybacks and dividends.

If that shift happens, investors may finally start to treat UK life insurers as high quality compounders backed by resilient balance sheets, rather than as high beta proxies for a crisis that the sector has already shown it can survive.

The content of this publication reflects my personal views only and is provided for information purposes. It does not constitute investment advice or investment research, and I am not acting in the capacity of an investment adviser. I own shares in some of the companies mentioned. Readers should carry out their own analysis or seek professional advice before making any financial decisions.