concept in the UK
In a move aimed at improving capital efficiency, Legal &
General Group (L&G) has become the first UK insurer to create a
new insurance special purpose vehicle (ISPV). Approved by the UK’s
Financial Services Authority (FSA) at the end of 2006, ISPVs form
part of the implementation of the European Union’s Reinsurance
Directive.
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L&G’s move is a sequel to the cession by its Legal &
General Assurance Society (LGAS) unit in December 2006 of all
non-linked, non-profit pensions and annuity business to Legal &
General Pensions Limited (LGPL), which is LGAS’s wholly owned
reinsurance subsidiary.
L&G said that the December 2006 action provided greater capital
transparency and flexibility but also created a capital
inefficiency. The inefficiency arose because while there was no
material change in the risk borne by the group, it was necessary to
hold regulatory capital in both the reinsurer, LGPL, and the ceding
company, LGAS. Converting LGPL into an ISPV was the preferred
solution to remove the capital inefficiency, said L&G.
Principal characteristics of an ISPV are:
• it is neither an authorised insurer nor a pure reinsurer. It is
an entity that assumes reinsurance risk and is authorised by the
FSA to fulfil a special purpose;
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By GlobalData• unlike a reinsurance company, an ISPV is not obliged to cover an
additional regulatory solvency requirement and in L&G’s case it
will be met in full by the ceding company, LGAS;
• an ISPV is obliged to be fully funded with finance subordinated
to its reinsurance obligations; and
• it is not required to complete an annual FSA solvency
return.
L&G said converting LGPL into an ISPV increased its regulatory
capital by an estimated £500 million ($1.04 billion) and its
embedded value by about £120 million net of tax. The latter amount
largely reverses a £132 million capital inefficiency created by
LGPL and reported in L&G’s 2006 results. The capital
inefficiency comprised primarily £119 million in respect of
in-force business and £13 million in respect of new business
written in 2006.
The conversion of LGPL into an ISPV is the latest in a series of
moves by L&G to improve its overall capital efficiency. Among
the most significant of these was the issue of £600 million tier
one perpetual capital securities in May 2007. The proceeds, which
increased L&G’s regulatory capital surplus, were used in part
to repay short-term senior debt and finance its acquisition of
Nationwide Life and Nationwide Unit Trust Managers. L&G is also
continuing with a £1 billion open-market share buy-back it
commenced in July 2007.
