Insurance Stocks Rise on Solvency II Tweaks

James Gard: Welcome to Morningstar. In a change from our usual stock of the week, today I’m looking at a sector of the week. And this time I’m going to talk about UK insurance stocks in the wake of last week’s Autumn Statement. The chancellor mentioned changes to something called “Solvency II”, a set of EU rules pinning down how much risk pension companies can take. This has naturally become a political debate over “red tape”. From the government’s perspective, watering down this set of rules will unlock billions of investment in what it calls “long-term productive assets”.
So what does it mean in practice? Insurance companies, especially those running defined contribution schemes, will be able to invest in more illiquid assets – and the Treasury hopes this will end up in infrastructure projects. But schemes could also invest in private equity, social housing, green projects – thereby earning higher returns and higher yields. In an ideal world, that would improve pension returns, reducing the burden on the state. Our analyst Henry Heathfield thinks the UK economy could benefit in the long term.
But it’s early days and it’s not clear whether the changes will benefit pension companies equally. Looking at two of the largest listed insurers, Legal & General and Aviva, their share prices have risen since last week’s announcement. But it’s been a tough year for the sector in the wake of the LDI crisis, so the shares are still playing catch-up. For Morningstar, I’m James Gard.

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