Member Info for Meconopsis

(PART 2!)

So, understood the need to have levels of SCR in excess of 100% then we get to the question of what *should* be the “correct” level?

To which the answer is, I don’t know. 🤷🏼‍♂️ But I broadly agree that it could stand being lower.

BUT/AND if you look at what Aviva has been doing then you’ll see the phrase “capital light” come up a lot. What this means is that they seek to make money through fees and advice, rather than tying up capital.

The L&G US Protection business disposal is text book example of this.

Previously, when L&G wrote a 30 year policy then it had to tie up capital, up front, to underwrite the business before seeing any profit.

What L&G has done is sell the business to Meiji Yasuda, who now have to provide the capital, but kept an economic interest in the US business. Removing the capital requirement has freed up that money for the buyback.

The subtlety here is that capital has been released and yet the SCR remains, broadly, the same.

We can expect Simoes to do more of the same - move to restructure business in a capital light way.

As Forrest Gump would say…and that’s all I have to say about that…

“So looking at Admiral's and Aviva's results today, they both have their solvency II ratio below 200% - Aviva at 180% and Admiral at 193%, whilst we're at 217%.”

MikeS02, this is a very tricky topic and right on the boundary of my knowledge, but I’ll have a go…

The Solvency Coverage Ratio is designed to protect against against market events up to the threshold of a 1 in 200 year event.

The reason that companies carry much higher SCRs is because they need to protect against a succession of 1 in 5 year, 1 in 20 year, etc market events taking the company below the regulatory requirement of 100%.

The 100% barrier is *one* important line. The one at which the regulator would step in.

But there are other “lines” that would create credit ratings downgrades by Moody’s and Fitch, etc. at which point borrowing becomes more expensive and customers less willing to park funds with you.

I am *told* that the credit rating agencies and companies have open discussions about these lines and these provide the boundary for modelling the impact of successive risks. So they don’t want the 1 in 5 year followed by a 1 in 20 year risks taking them below the “ratings line”.

Where those lines exist depends on the type of investments held by the company. So, if you look at PHNX/SDLF their Board aims for a SCR in the range of 140-180%, which is much lower than L&G and reflects the Board’s belief that their higher sovereign debt exposure reduces market volatility at times of stress. This belief will have been assessed by the ratings agencies.

The PRA ran some stress tests last November against the life insurance companies and under those scenarios:

- L&G’s SCR dropped from 220% to 182%

- PHNX’s SCR only dropped from 172% to 155%

The difference in drop reflecting the difference in investments.

This shows that L&G is always going to have to carry a higher SCR than PHNX based on the current investment mix.

Just as a point, it’s harder to compare L&G with ADM as it’s a general insurer. And even AV. Is a difficult comparator after the DLG acquisition.

I’m not sure I follow the logic nicknaim.

If you have a strong conviction that the market is going to fall and it does then cash is a very good place to be indeed. In that sense it’s no different than being in oil or defence.

I completely agree on your wider point that life will go on.

The last carrying value at the beginning of Feb was (according to Gemini) £410m based on a $107bn enterprise value. So that would move it to nearly £600m.

If you've not read it then this is the article that precipitated the latest fall in SAAS and other stocks...

The article was published two days ago and is a thought experiment on the potential impact of AI on the US economy. Well worth a read - even if there are aspects that can be easily criticised.

https://www.citriniresearch.com/p/2028gic

I’ve dropped you an email address in “the other place”.

Crossley - all good thanks mate.

I’m using Tier 1 capital as a proxy for book value. The easiest place to pull the figures from are the Solvency Capital Reports.

The Tier 1 capital is split into restricted and unrestricted capital. I’m taking all of the Tier 1. A more cautious approach would be to use just the unrestricted capital.

Your favourite AI should be able to do the heavy lifting for you.

Robleo - I fully appreciate the relative share price movements…

It depends, of course on your valuation metric. But if you take price per book value then MNG would need another 25% share price rise to get to the valuation levels of LGEN and PHNX.

The assessment comes out differently if you use something like yield. Although there are good reasons why MNG should trade on a lower yield than LGEN - so it’s difficult to argue that the yields should all revert to the same.

The question, with anything like this, is

Bumblebee1 - LGEN has a higher dividend yield than PHNX at the moment. Invest the same amount in both and LGEN will give you the higher overall dividend.

LGEN is also cheaper on many measures than PHNX - so potentially more room for capital growth. Although, in many senses MNG is the cheapest of the bunch.

“ Not announced yet, usually second half of April and August, paid in June and September”

The dates for both dividends have been published already and are on their financial calendar - https://group.legalandgeneral.com/en/investors/financial-calendar

“ Early 2020, the sp went to 330p or 340p (approximately). This is a solid company pays great dividends.”

I completely agree with the second statement.

The first needs some macro-economic context.

The 10 year gilt yield currently sits around 4.4%. Given that gilts are as close to risk-free as you can get then an investor buying a dividend income will typically want a 1.5%+ above that for taking the risk.

That’s what currently sets a floor yield of 6-6.5%. Rightly or wrongly, the market considers LGEN more risky than other financial companies because of the capital tied up I. The accounts and the exposure to bonds.

In 2020 the 10 year gilt yield was 0.5% - so on the same basis. We’ll all remember how rubbish savings rates were. At the time, LGEN was providing a 6-6.5% yield.

So, just because a share has previous reached a price - even with lower earnings - it doesn’t necessarily follow that it sets a precedent for where the share will logically go.

So…

Having disagreed with you, I’m now going to agree with you!

Because my post below doesn’t take any account of the buyback.

So “low 300s” becomes 330-340 after you’ve bought back 8% of the outstanding shares.

The only point I’m trying to make in pointing this out is that historical share prices exist in an economic context that needs to be taken into account.

“how do they handle cash which might be being held between selling and the next buy”

The proposal provides a temporary period before interest is taxed.

The proposals are actually a reversion to old rules. You previously couldn’t hold money market funds in an ISA or be paid interest on cash balances.

The proposals are, frankly, stupid. Of that I’m sure we can all agree.

“ Meconopsis - not convinced SpaceX’s transition to a listed company would significantly narrow SMT’s discount to NAV.”

The *theory* is that private holdings are generally hard to value - so they tend to force a trust onto a discount to NAV. Publicly traded holdings are simple to value.

As I say, that’s the *theory*.

Whether it happens…

“ No. Last years commenced 13th March, so hopefully very soon.”

Results are on 11th March - so 13th isn’t going to be far off in terms of timescale.

IMV 350 is probably the upper end of where we can hope to get to as it would put the share on a 6% yield. (Actually, 363 for a 6% yield.)

Another way of looking at this is how the share price would do rerating to its peers…

PHNX - 7.5% yield would be 291

MNG - 7.1% yield would be 307

AV - 5.7% yield would be 382

There are good reasons why the market is *highly* unlikely to move LGEN to a AV rating as the risk profiles of the two companies are very different. Aviva carries more short term risk through its exposure to general insurance and, consequently, extreme weather events. LGEN has much less short term risk, but greater long term risk through its annuity and PRT businesses.

My view is that low 300s are eminently likely. Much more would require the base rate to drop another 1%.

Thanks for the post Rogue_rader.

Whilst it’s fair to focus on SpaceX, it’s worth bearing in mind a few other things:

- if the presenter has stuck with a $1.25tn valuation then he’s understating the more likely $1.5tn valuation post XAi merger

- “the market view” is that both Stripe and Databricks are likely to IPO this year, which will add another 3-5% to NAV

- it’s not beyond the bounds of possibility that Anthropic also moves to IPO as well this year - the Board appointment of Chris Liddell suggests that they are in pre-IPO mode and they are the closest of any AI company to being profitable thanks to Claude Code and their AI agent offerings. That’s probably worth another 1% on NAV

- (my view is) that SMT are likely to use the IPO secondary offering to sell down a good part of their stake in SpaceX as their holding will otherwise be (way) outside of their stated goal of having no more than 8-10% of the portfolio in a single share. Doing so would bring around $1bn back in as cash

- the transition of SpaceX from private to public *should* have the effect of narrowing any discount to NAV

Just my views :)

@fangkat - apologies. An overly grumpy response to your grumpy post.

It didn’t help that I spent a large part of yesterday with someone who - with no sense of irony - both complained about how the NHS has gone to rat***t and then boated about avoiding VAT on his building work by paying the builder cash in hand a nearly six figure sum.

“You gotta have money to save money” nearly pushed me to punch him ;)

Divi-Collector - the sale’s been concluded and LGEN has the money. They’ve reiterated the buyback intention- just not started yet.

FangKat - TBH I’m not sure what you’re complaining about.

You didn’t pay tax on the money going into your pension fund. In fact, you probably got a tax free employer’s contribution in addition to the tax free money you put in.

And you seen hell bent on only paying 20% tax now - even when you risk paying IHT and tax on top.

Instead you could pay 40% now; gift the money and benefit from taper relief even if you die within 7 years.

If your point is that you don’t want to pay *ANY* tax on that money then I’m not sure you’ll find a sympathetic audience in many places.

You could gift the house and the bonds now. And benefit from taper relief.

If your point is that you don’t trust your sons to look after you tomorrow if you give them the money now then that’s not a tax problem. It’s a family problem.

In truth, you could/should have thought about this years ago. You are over 75 and the tax free thing for your pension hasn’t applied to you for over 5 years.

You got very generous tax breaks when you paid in. So please stop whining about your lack of tax planning.

Tax isn’t thievery. It’s the price we pay to live in the civil society that pays your state pension. And all the rest of it.

Cardinal3 - people were being negative last year when we were trading in the early 200s - so I would t read anything into the negativity 🤣🤣🤣

‘ To Meconopsis I say the IFRS figures are not called 'fundamentals' for no reason: MNG is making losses, not profits, no matter how the directors may dress them up.’

I will politely point out that they are making an “internationally recognised accounting loss” and not a real loss.

You clearly have no reason to believe me, but maybe Buffett may be more compelling - https://www.berkshirehathaway.com/letters/2018ltr.pdf

You could also read these…

https://www.esrb.europa.eu/pub/pdf/reports/esrb.report.FinancialstabilityimplicationofIFRS.202112~1c930d5e1b.en.pdf

https://www.mckinsey.com/industries/financial-services/our-insights/insurance-blog/ifrs-17-insurers-should-plan-for-strategic-challenges-now

The reality is that the IFRS numbers represent a “liquidate the business today” number, which is not a realistic representation of an ongoing concern.

I have no idea where you get the idea of IFRS representing “fundamentals”. My accounting friends use the term “farcical” in preference.

In truth, if you don’t like the business and/or don’t understand it then it’s better to not be a holder.

‘ In case you hadn't noticed, the dividend increases, while maintained, have not been impressive (last one 1.5%), which I would say reflects the lack of profit.’

I agree with you on the first point (impressiveness), but your second point (lack of profit) demonstrates your lack of understanding than a lack of profit. Dividends - by definition - being a distribution of retained profit.

A thing you’re missing - because you clearly don’t understand the accounting - is that you can (now) judge the safety of a life company’s dividends by its CSM. Life companies are *unique* in providing a forward look into future profits. No other UK companies have 10-20+ years of profits tied up on the books.

Full disclosure here… I have held, no longer hold MNG. Not because it’s a bad company - just because other life companies offer more potential IMV.