You have to be as big and fearless as the Financial Times or as small but fearless as this blog, to publicise what people in the City are talking about, the breaking up or even the wholesale sell of L&G to someone else. Last week Emma Dunkley pointed out Legal and General as vulnerable to an offer from an American insurer and finance house. Here Emma repeats the rumours in the FT’s Monday email.
It seems impossible for any UK insurer to carry out the task of dismantling our DB pension system without the help of America and its benign regulation of bulk purchase annuities.
It’s been a difficult couple of years for London-based Legal & General, the FTSE 100 insurer and asset manager.
L&G’s share price has been flat as new entrants and tight credit spreads have squeezed profits in its core market — sparking speculation over whether L&G could be sold or broken up, write Lee Harris and Emma Dunkley.
Analysts now question whether L&G’s dividend is sustainable and whether it can survive as a public company. City advisers told the FT that potential bidders, including insurers and alternative asset managers, had been running the rule over the business.
“It’s getting pretty real,” one US private capital executive said about groups drawing up plans to bid for L&G. “People are spending real money on this now.”
“It feels like we’re being dressed up for a sale,” said one current L&G insider. Core businesses, such as index funds in the asset management arm, were “keeping the lights on”. “But they know they’ve got a structural problem and they are trying to throw everything at it.”
Private capital executives told the FT that there were a host of strategic alternatives open to L&G — if it chose to pursue them — from selling off blocks of its sprawling insurance portfolio to offloading assets to reinsurers. It could also find a private capital partner to assume some of its pension risk transfer assets.
Potential bidders have also considered a full takeover of L&G, four people familiar with those discussions said, though any such transaction would be challenging and politically sensitive due to the size of L&G and its large holdings of gilts.
Still, chief executive António Simões told the FT he was not considering a break-up or sale. “There’s no discussions or anything else going on,” he said. When asked if L&G had been approached, he added: “I am 100 per cent focused on executing my strategy.”
Selling the Family Silver vs. Legal & General
Harold Macmillan famously warned that privatization was like “selling off the family silver,” critiquing the short-term liquidation of valuable national assets for immediate cash.
A similar dynamic appears as private equity firms (“vulture capitalists”) circle Legal & General. In both cases, the core similarity lies in the risk of short-termism: sacrificing long-term, stable institutional assets for immediate profit. Just as Macmillan feared the permanent loss of state treasures, critics today worry that predatory capital will dismantle a foundational financial institution, extracting quick value while eroding the long-term economic security and stability the asset originally provided.
These are my personal views as entirely an outsider.
The key question is what would a change of ownership of its shares do to the risk profile of L&G. Presumably the PRA and UK Solvency would still consider the capital adequacy of the UK entity and if they felt that it was inadequately capitalised would require further capital provision before allowing the company to write any further business.
The problem is that with gilt yields rising the risk margin on new and recently written business has been eroded (is there still a “risk premium”). To me this suggests that irrespective of who owns it, L&G will require substantial capital injections in the near future. A private capital purchaser would therefore not only have to buy out the existing investors but also anticipate a substantial capital injection, all this further reducing the potential future returns at a time when the availability of US Private Equity capital is being challenged by significant redemption requests..
The one thing we need to avoid is UK pension funds being encouraged to invest in US private equity only for those funds to be used to provide the risk capital to the insurer seeking to buy out their liabilities. This would appear to me to substantially increase the risk to the pension benefits.
I think we might well see bulk annuity purchases being priced on a gilts minus basis and perhaps think of the regulatory implications.
If L & G are looking for an injection of funds, would it be in their interest for António Simões (CEO) to float new shares to existing shareholders at a discount?
Selling the Family Silver vs. Legal & General
Harold Macmillan famously warned that privatization was like “selling off the family silver,” critiquing the short-term liquidation of valuable national assets for immediate cash.
A similar dynamic appears as private equity firms (“vulture capitalists”) circle Legal & General. In both cases, the core similarity lies in the risk of short-termism: sacrificing long-term, stable institutional assets for immediate profit. Just as Macmillan feared the permanent loss of state treasures, critics today worry that predatory capital will dismantle a foundational financial institution, extracting quick value while eroding the long-term economic security and stability the asset originally provided.
Sorry about the duplication
My concern is the bullish attitude to illiquid private credit sold to retail market or wrapped as it was a few short years ago
The U.K. needs a strong financial services industry or it could finish up an American aircraft carrier with no engines anchored off the coast of Europe
Yes, the fact that we have warships stuck in port due to poor management and funding is a very sensitive subject due to our UK bluff being called very recently. Last of the Empire’s Warriors.