Audio embedded below.

About 10 years ago I sat down with an analyst at one of the big UK fund managers to walk him through a listed UK life insurer’s bulk annuity book. He understood the upside. He could see that matching meant very little could go wrong. He had two problems. He doubted he could explain the asset to his portfolio managers as well as I had explained it to him, and he knew the PMs were on a clock. If sentiment did not soften in the next few months, they would pull the plug. He wanted to know when it would soften. I could not tell him it would change any time that year.

In the end he bought the insurer’s subordinated debt himself, personally. He understood the asset and was prepared to back it with his own money. For the equity book he proposed a wealth manager, and his PMs bought it. The same person, looking at the same insurer, valued the BPA cash flows enough to own the debt and judged the listed equity wrapper unsellable to his own colleagues.

A decade later, Standard Life has reached the same conclusion at the corporate level, and is doing both things at once. The FT reported on 22 April 2026 that a consortium led by CVC and Prudential Financial has emerged as the frontrunner in Standard Life’s process to bring third-party capital into its UK bulk annuity (BPA) business, the market in which insurers take on defined benefit (DB) pension scheme liabilities from corporate sponsors in return for an upfront premium. The reported deal would commit more than £1bn of equity to a newly created Standard Life subsidiary, drip-fed in over time as new pension scheme deals are written. It pairs with the £2bn acquisition of Aegon UK announced a week earlier on 15 April 2026, which almost doubles the listed entity’s DC platform.

Standard Life is doing what its shareholders want. The bigger question, and the one that runs through this piece, is whether its shareholders want the right things. In the near term the deal is likely good for the share price. Over the long-term I do not think it is good for earnings.

This piece builds on my 14 April note on private capital moving into UK bulk annuities and my 15 April note on the Aegon UK acquisition. The two threads converge here.

A year of process, and an unusual choice of partner

The process has been in train for over a year. CEO Andy Briggs flagged the direction of travel publicly at the 2024 full year results in March 2025, telling analysts the company was exploring ways to partner with third-party capital using its origination capability in the market, and that funded reinsurance had become “a more challenging focus because of the evolving regulatory position”. In October 2025, Bloomberg reported the formal process, codenamed Project Ocean and run by Fenchurch Advisory, with initial bidders Blackstone, KKR and Sixth Street. By late 2025, BlackRock and Goldman Sachs Asset Management had also joined (source: FT). The April 2026 FT report has CVC and Prudential Financial in pole position. The rebrand from Phoenix Group to Standard Life completed on 2 March 2026.

The choice of partner is itself a signal. CVC brings the capital. Prudential Financial brings the operating platform, as the largest pension risk transfer writer in the United States, with over $110bn of transactions completed since 2012 and seven of the ten largest US deals to its name. The losing bidders, BlackRock and Goldman Sachs in particular, would have the same financial power but brought less insurance balance sheet expertise. Standard Life has chosen actuarial knowledge alongside the capital, not just the capital.

Why this structure is not Athora, not Brookfield, and not L&G/Blackstone

Most of the recent private capital moves into UK bulk annuities have been outright acquisitions. Athora, the Apollo-backed European reinsurer, completed its £5.7bn acquisition of Pension Insurance Corporation (PIC) on 27 March 2026. Brookfield, the Canadian alternative asset manager, completed its £2.4bn acquisition of Just on 1 April 2026 at 220p per share, a 75% premium to the undisturbed share price. L&G’s tie-up with Blackstone, announced on 10 July 2025, is structurally different again. It is a $20bn private credit asset-management mandate over five years, sitting on the asset side of L&G’s balance sheet rather than the equity side, with the listed entity unchanged.

The Standard Life CVC structure is not like any of those. The listed entity stays public, and the regulated UK life insurance subsidiary, SLAL (Standard Life Assurance Limited, the group’s regulated UK life insurer), stays whole. Inside SLAL a new sub-entity is created specifically to write new BPA business, with the consortium taking an equity stake (by some accounts a majority) and the capital drip-fed alongside new business rather than handed over upfront.

The closest precedent I can think of is Apollo’s ACRA sidecar at Athene, where third-party investors fund the new business strain on annuity deals and take a corresponding share of the spread economics. If the Standard Life structure follows that template, the consortium takes the bulk of the capital strain and spread, while Standard Life keeps origination and asset management fees on a much bigger pool.

What the Standard Life 2025 results tell us about the strategy

Standard Life’s 2025 results, published in March 2026 under the new name, give the cleanest picture of what the deal is for. Standard Life wrote £3.9bn of pension risk transfer (PRT) volumes in 2025, down from £5.1bn in 2024. Total annuities capital strain was £162m for the year, down from £206m in 2024. The largest deal was £1.9bn, the biggest the company has ever written. The slides accompanying the 2025 results disclosed lifetime IRRs of more than 20% on Standard Life’s annuity book, which includes both bulk purchase annuities and individual annuities.

Two things stand out. Management has been running below their own strain budget. The implied capacity is around £200m a year. They actually used £162m. This may be due to increased competition in the PRT market which we witnessed last year but also is consistent with selective pricing at the high end, and it is consistent with Standard Life being capital-constrained at the top of the market. It cannot always be at the table for £5bn-£10bn jumbos against PIC, L&G and Rothesay because it cannot fund the strain. The CVC and Prudential capital line is precisely what removes that constraint. The new vehicle is the way Standard Life writes multiple jumbos a year rather than one.

The bigger story is a lifetime IRR of more than 20%. Public market investors do not value it at anything close to that. They discount it heavily, I expect almost by half, for the asset risk, longevity risk, regulatory risk and the sheer complexity of a 30-year liability. That gap between the disclosed return and the credit equity investors are willing to give it is the gap private capital is buying into. CVC and Prudential Financial are being invited into a business at a return the public market refuses to credit. The economic question for the listed shareholder comes down to whether the asset management fees and minority spread share, on a much bigger pool, exceed what the company would have made writing a smaller pool with 100% of the economics.

The DC mirror: what the Aegon UK deal does

The proposed CVC deal does not sit in isolation. On 15 April 2026 Standard Life announced it is also buying Aegon UK for £2bn, due to complete by end-2026. The consideration is £750m cash plus shares giving Aegon a 15.3% stake in Standard Life. The deal adds £160bn of assets under administration and 3.8m customers. The combined group will rank second in the UK workplace pensions platform market and first in UK pensions and savings. Management is selling the deal as capital-light fee income: £160m of additional operating cash generation a year, £190m of additional operating profit, and £800m of total net synergy value.

Read the two deals together and the strategic shape is unmistakable. The Aegon UK deal pushes the listed entity toward defined contribution (DC) and capital-light fees. The CVC deal carves the spread book out into a partly-owned subsidiary. The economic mix of the listed Standard Life is shifting away from the BPA spread and toward DC platform economics.

What the share price tells us about whose mind they have to win

The market reaction to the Aegon deal has been positive. Standard Life rose from 713.8p at close on 14 April 2026 just before the Aegon UK announcement to 776.4p on close on 21 April 2026, a rise of 8.8%. The listed market likes the DC tilt.

The reason is partly a function of who is buying the shares, and it is the same problem the buy-side analyst I sat with a decade ago could not solve. The Standard Life investor base, in common with the broader UK life sector, draws heavily from generalist asset managers. The “AUA x margin x persistency” profitability model they apply to DC is a model they recognise well as it is the model of the business they themselves run. They live inside it every day. That is why DC platform pensions, wealth managers and platforms are intuitive for those fund managers. A bulk annuity book is not.

The DB / BPA model is the opposite. It demands real work to understand: Solvency II capital generation, the matching adjustment, contractual service margin, longevity tables, embedded value, lifetime IRRs on new business. The cohort of investors fluent in that vocabulary is small and shrinking. The share prices of Just Group prior to the Brookfield takeover or L&G demonstrate that public market investors do not reward the spread model. Management’s working assumption, entirely defensible over a 3-5 year horizon, is that the market will not start to reward it any time soon.

Read in that light, the Aegon UK plus CVC strategy is a rational response to the listed market’s actual preferences. Tilt the company toward what the listed market understands and rewards. Hand the bit it does not understand to people who do. That is exactly what Standard Life is doing.

Why this fits both halves of the listed entity’s history

The listed entity rebranded as Standard Life on 2 March 2026 carries the DNA of two predecessor companies, and the two deals announced in April fit each predecessor’s identity neatly.

The original Standard Life, the company that demutualised in 2006, was an explicitly capital-light pitch. I wrote the investment case as IR director at the time, and the story to public market investors was fee-based asset management economics, SIPP and wrap distribution, and DC platform growth. Spread risk was not part of the equity case. The Aegon UK deal, with £160bn of additional AUA, 3.8m new customers and £160m of additional operating cash generation, is the listed Standard Life reverting to that original brand on a much larger scale.

The original Phoenix, which acquired Standard Life Assurance in 2018 and gave the combined group its closed-book backbone, was a UK consolidator. The model was conservative hedging, predictable cash generation, and very little new business strain. My feeling from chatting to shareholders is that the BPA push of the past three years sat slightly awkwardly with that identity, asking the company to take more spread risk, more new business strain, and more asset side credit risk than the consolidator brand had been built around. The CVC structure resolves that tension. The company gets scale in BPA, books origination and asset management fees on a much bigger pool, and parks the new business strain and most of the credit risk in a separately-capitalised vehicle.

Read together, the two deals are the listed entity reverting to type on both halves of its inheritance at once. That is rational from management’s risk-tolerance lens. It is not the same as saying it is value-creating from the listed shareholder’s economic-exposure lens. Whether the deal is sensible for the equity holder depends entirely on terms that have not been disclosed. The 20%-plus lifetime IRR Standard Life is currently making on annuity business is the benchmark against which any new partnership has to be judged.

Why I am still uncomfortable with the trade as a long-term investor

If I consider what will impact earnings over the long-term, several things make me wary, even allowing for management's near-term reasonable response to the actual investor base.

The first is the revealed preference of private capital. Apollo, Athora, Brookfield, KKR, Blackstone, CVC, Sixth Street, BlackRock and Goldman have all run processes for, or completed acquisitions of, UK and European spread / BPA assets in the last 18 months. Not one of them is buying UK DC platforms. Nobody is bidding for SJP, or Quilter. The most sophisticated long-duration capital allocators in the world have looked at the same UK savings market and made a clear choice. The choice is spread, not DC. That is a near-perfect natural experiment on which model is the better business to be in for a buyer that does the work.

The second is the valuation evidence. Looking across the comparable peers as of April 2026, the wealth mangers/platforms trade on forecast P/Es of 13-17x and dividend yields of 3-5%. Standard Life trades on a forecast dividend yield of around 7.7% while the other PRT writers yield 7-9%. The DC platforms do trade at a premium to spread insurers in the listed market. Private capital, however, is paying very different prices for the same BPA assets. Athora paid £5.7bn for PIC and Brookfield paid £2.4bn for Just at a 75% premium to the undisturbed share price. Those are valuations the listed market consistently refuses to give Standard Life, L&G, M&G and Aviva for the same asset class. The same cash flows look like a bargain to private capital and a value trap to public markets.

The third is the historical pattern of insurers exiting spread at the wrong time. The US variable annuity story is the cleanest. I remember Voya, Hartford via Talcott Resolution, MetLife via Brighthouse, and Corebridge all offloaded legacy VA books, mostly to private capital-backed vehicles. Public listed players would not touch any of it. The feared tail risks did not show up at the modelled severity, and the private buyers compounded those books at very attractive economics for a decade. The current case is unusual in that there is no crisis driving Standard Life's exit. The mechanism is the same. There is a real risk that 2026 is to UK BPA what 2009 onwards was to US variable annuities.

What this tells us about the public/private valuation gap

The CVC deal would be the third major UK BPA transaction this year. PIC went to Athora at £5.7bn. Just went to Brookfield at £2.4bn. Standard Life is now letting CVC and Prudential Financial in at the new business margin in return for £1bn-plus of fresh equity. Five of the most sophisticated long-duration capital allocators in the world have looked at the UK BPA market and concluded it is worth real money.

The listed sector’s response to that signal has been to move closer to what the listed market does reward. Standard Life’s response to the valuation gap is to move its centre of gravity away from the bit private capital is paying up for, and to grow the bit private capital is not interested in. To me, that is striking, and it is the right move only if you believe the listed market never closes the gap. Management appears to believe exactly that, which I have a lot of sympathy for. The gap hasn’t closed in the past 5 years, so why should it close in the next 5?

For a listed shareholder who shares that view, the deal is fine. The dividend yield, the buybacks and the disclosed Aegon UK synergies should compensate over a 3-5 year horizon. For a listed shareholder who thinks the gap will close and has a longer-term time horizon, the deal is a quiet form of corporate concession that the listed market will be the wrong place to own UK BPA economics for the foreseeable future. Both views are understandable.

Where I could be wrong

There are scenarios in which I am wrong.

The CVC deal could come at terms that are clearly value-creating for retained shareholders: an asset management fee structure that scales with the pool, a minority equity slice of new business at favourable terms, and a strain reduction that frees capital for buybacks. The terms have not been disclosed. Until they are, this is an analytical inference, not a confirmed P&L impact.

The DC business could be more profitable than I credit. Aegon UK does come with cost synergies and a network effect Standard Life can scale. My scepticism is from years of margin pressure and years of continuous technology spend on these platforms.

The PRA published its funded reinsurance consultation on 29 April 2026. I was at the Westminster and City conference and heard the PRA make the case in person. As proposed, the changes would take capital held against the average funded reinsurance trade from 2-4% of annuity liabilities to around 10%, and would apply to all new business from 1 October 2026. What this does to BPA spread economics is genuinely uncertain. It depends on how UK insurers reduce or restructure their use of funded reinsurance, how the offshore reinsurance counterparties respond, and how the consultation itself lands after industry feedback. The PRA has set out a direction of travel; the market response is not yet visible. Selling a slice of the listed BPA economics against a regulatory backdrop none of us can yet read is hard to defend on the merits.

A quieter form of concession than the share price suggests

If the FT report lands as described, Standard Life will have written one of the most interesting pieces of insurance corporate engineering in the listed sector that I can remember. The deal is consistent with the company’s lower-risk DNA. It scales the BPA franchise without taking the marginal balance sheet pain. It pairs with the Aegon UK deal to rebalance the listed entity toward DC fee income, which is what the share price has rewarded so far.

If I take the longer-term view, after both deals are complete, the listed shareholder owns a smaller slice of the better business and a larger slice of the worse one. The five-year listed investor with a DC mental model can rationally clap. The longer-horizon investor who believes UK BPA is the most attractive insurance business model in the world, and that the listed market discount on it is mispricing rather than truth, has just watched a piece of that business move out of the listed wrapper, into a partly-owned vehicle, on terms that have not been disclosed and on a timeline they did not control.

Standard Life is doing what its actual investor base wants. The bigger question, and the one I keep coming back to, is whether its actual investor base wants the right things. History on insurers exiting spread at the wrong time, and the revealed preference of private capital that is right now buying every UK BPA franchise that becomes available, both suggest the answer might be no.

Want a deeper dive on UK life insurers, annuity balance sheets, and why markets often misprice them in stress? That is the core theme of my book, Breaking Down the Insurance Black Box.

Buy the book

Gordon Aitken runs Aitken Advisory, providing strategic advice on UK and European life insurers and pension funds. I work with investors, insurers and advisers on transactions, capital strategy and market positioning. If you would like to discuss a potential engagement, please get in touch.

Disclaimer

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.

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Audio embedded below.

A dreich day at the Gyle

Sometime in the mid-1990s, with the new business park still half-built, Standard Life’s then General Manager (CEO) Scott Bell was driven out to have a look at it. Edinburgh Park is its official name, though everyone in Edinburgh just calls it the Gyle. Standard Life itself was still based at 3 George Street, where, as it happens, I spent three university summers in the actuarial department. The new Lothian Road headquarters, opened by Princess Anne in 1996, was still on the drawing board. The question that morning was whether Standard Life should abandon the city centre and follow the fashion out to the edge of town.

It was, by all accounts, properly dreich. For readers outside Scotland, dreich is the word we use for weather that is wet, grey and generally miserable, all at once. Scott’s driver Willie opened the door. Scott put one foot on the wet tarmac, looked around at the wind blowing across the half-built estate, and said: “Take me back to town Willie.” The car turned around and Standard Life stayed in the centre of Edinburgh. I heard the story shortly after I joined Standard Life.

Scottish Equitable, which later became Aegon UK, did take the plunge. The Gyle became their home. On Wednesday 15 April 2026, Standard Life announced it is buying the business that ended up at the place Scott refused to get out of the car for. The price is £2.0bn, and the strategic prize is scale.

Two of the three

When I was IR Director at Standard Life through the 2006 demutualisation, the idea that Edinburgh’s three big pensions houses could one day combine was already in the air. It was never written into strategy slides; it was just talk at the time. The logic was obvious. The owners were never going to line up at the same moment: Lloyds would not sell Widows, and The Hague sat on Scottish Equitable.

Twenty years on, two of the pieces have finally come together. Standard Life plc pays £750m in cash and issues 181.1m new shares at a 30-day volume-weighted average price of 690p to Aegon, who ends up with 15.3% of the enlarged group. Completion is expected around end 2026.

On the announced multiples, Aegon UK is valued at 0.83x Unrestricted Tier 1 own funds (the highest-quality capital on the Solvency II balance sheet, £2.4bn at FY25), 14.2x 2025 operating profit after tax, and 1.9x IFRS shareholders’ equity. On paper the 0.83x looks cheap. There is a straightforward explanation for why it isn't.

Reading the 0.83x properly

Start with the return on own funds. Aegon UK’s Operating Cash Generation (OCG, the post-tax cash surplus released from the in-force book each year after meeting capital requirements) was €194m in 2024 and €188m in 2025, roughly £160m at current exchange rates. Set that against closing own funds of £2.4bn at FY25 and the return on own funds is running at about 6.5 to 7%. I’d estimate that a shareholder’s current cost of capital for a UK life insurer of this profile, given where bond yields now sit, is around 9%. A standalone business earning 6.5 to 7% on its capital cannot justify a premium to book. Capitalise £160m of annual OCG at a 9% cost of capital. On a Gordon Growth basis with zero assumed growth, fair value = OCG / cost of capital = £160m / 9% = £1.78bn, or roughly 0.74x own funds. Standard Life has paid £2.0bn, equivalent to 0.83x own funds.

The c£200m gap that I have estimated is the synergy premium. Announced total net synergy value is £0.8bn: £110m pa of pre-tax cost synergies (more than half banked by end 2029, the rest by end 2031) and about £340m of one-off capital synergies, net of integration costs of c.£0.3bn and separation costs of c.£0.1bn. On those numbers, I estimate Standard Life has paid away roughly £0.2bn of that synergy value to Aegon and retained the other £0.6bn, about three-quarters of the total, for its own shareholders. In my experience that is a typical split when the buyer is the natural consolidator and the seller is a motivated exiter. The deal comes through as accretive to mid-single digits of adjusted EPS by 2029, adds £160m to annual operating cash generation, and delivers £400m of incremental excess cash over five years.

There is a second subtlety worth drawing out, which takes us back to the old embedded value debates. The 0.83x multiple is not low by historic transaction standards; the denominator has simply shrunk. When UK life books used to trade on embedded value (EV, the pre-Solvency II valuation measure that took net assets and added the present value of future profits expected to emerge from the in-force book), EV was a much bigger number than today’s regulatory own funds because it captured those future profits and the with-profits estate. A similar fractional multiple applied to a larger base produced a bigger absolute price. What looks like a discount today is, in many cases, the same multiple applied to a smaller accounting measure. I’ve wrtten about this in We Knew How to Value Insurers, Then We Forgot.

Scale is everything in DC

The other reason Standard Life is willing to pay 0.83x is the nature of the asset. Aegon UK is fully fee-based. The £9bn UK annuity book went in 2016, £6bn to Rothesay in April and £3bn to L&G in May, at a loss of €628m. Since then Aegon UK has been a workplace pensions, adviser platform and retail savings business with no annuity capital drag. Capital-light fee income is exactly the business mix an acquirer wants in the UK market today.

The challenge is that defined contribution (DC) workplace pensions and retail platforms are a margin-compression story. Auto-enrolment charges are heading towards 30 to 40 basis points, well inside the 75bps auto-enrolment default fund statutory cap (introduced in 2015 and unchanged since). The retail platform fee war, Hargreaves Lansdown against AJ Bell against the insurer platforms, shows no sign of abating. Fixed cost per pound of assets is what matters. Aegon UK never reached the critical mass to win that fight alone. Stack it onto Standard Life and the combined group becomes the number two in UK Workplace and number two in UK Retail, with £480bn of assets under administration, 16m customers, and pro-forma gross annual flows of £18bn in Workplace and £12bn in Retail. Workplace AUA moves from £71bn to £145bn; the retail business moves up to number two.

Source: Standard Life

Capital-light, fee-based earnings as a share of the enlarged group move from 47% to 57% post synergies. For a company that has spent years shifting its earnings mix away from balance-sheet intensity, this deal does in one step what would otherwise have taken five years.

The orphan business

Which brings me back to the Gyle. Some years ago I was in a meeting with the then-CEO of Aegon, the Dutch parent. I happened to mention “the Gyle” in passing. He had no idea what I was talking about. The CEO of the parent company did not know the name of the business park where his UK subsidiary was headquartered.

That exchange has stuck with me, because it explains almost everything about why Aegon UK ended up here. This was an orphan business inside a group whose attention was elsewhere. The adviser platform has been in persistent net outflows for several years. A return on own funds of 6.5 to 7%, well below the cost of capital, is the financial reflection of a business that was never going to be the group’s strategic priority.

Aegon had been signalling the direction of travel for years: selling the annuity book in 2016, slimming the group down to its core growth markets, and committing to re-domicile to the US on 1 January 2028. The UK exit was always the next step. When The Hague announced its strategic review in December 2025, the outcome was obvious to anyone paying attention. Proceeds now go to Aegon deleveraging and share buybacks; the 15.3% Standard Life stake is locked up until the earlier of 18 months post-completion or the US re-domiciliation; and Aegon picks up one non-exec seat on the Standard Life board while it holds above 10%. On balance, a clean exit.

What could go wrong

Start with the track record. Standard Life (recently renamed, previously Phoenix) has consistently over-delivered on prior integration projects, from ReAssure to Standard Life Heritage to the Abbey Life book. £110m pa of cost synergies, on a £0.8bn net synergy total, is a credible number rather than a stretch one. Capital synergies are generally the more straightforward piece, coming from model harmonisation and diversification benefits rather than execution-dependent cost programmes.

The risks are still worth naming, but they are general rather than deal-specific. Adviser retention on the Aegon platform could go either way. A bigger, better-resourced platform may actually improve stickiness, and platform persistency is in any case a sector-wide DC issue, not something unique to this deal. Fee compression sits in the same bucket. The whole industry is living with the pressure on fees; this deal is a response to that pressure, not a new source of exposure to it.

The one risk I would underline is pace. The rationale for paying up depends on scale defending margins in a fee-compression world. If compression accelerates faster than assumed, say a competitor treats workplace as a loss-leader for a retail franchise, the incremental assets are worth less than modelled. The deal has to run fast enough that the synergies land before fee compression eats the base.

Where this leaves Edinburgh, and Scotland

This is a good day for Edinburgh, and a good day for Scotland. I say that as a Scot with family still up there. One of the quieter sadnesses of the last 20 years has been watching how much of Scottish financial services has drained south. When I started in sell-side research at Credit Suisse, a Scotland trip was a proper two days: a day in Glasgow first, to see Britannic and the old Scottish Mutual business that ended up with Abbey National, and then a full day in Edinburgh. By the end of my sell-side career, even half a day was a stretch. Head offices moved, decision-making moved, and so did the money.

This deal runs the other way. Capital is staying in Edinburgh. The shares opened higher on the morning of announcement, reflecting a deal that was well telegraphed and largely priced in.

The more interesting question, though, is the one this deal teases open rather than closes. Scottish Widows remains inside Lloyds, where it has been since 2000. At some point Lloyds will face the strategic choice The Hague has just faced. There is now a well-capitalised buyer with real integration credibility sitting a mile or so down the road. Does it make sense for Widows to go to Standard Life? I think the question answers itself. Two of the three are finally one. The third is still Lloyds’ to decide.

Want a deeper dive on UK life insurers, annuity balance sheets, and why markets often misprice them in stress? That is the core theme of my book, Breaking Down the Insurance Black Box.

buy the book

Gordon Aitken runs Aitken Advisory, providing strategic advice on UK and European life insurers and pension funds. I work with investors, insurers and advisers on transactions, capital strategy and market positioning. If you would like to discuss a potential engagement, please get in touch.

Disclaimer

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.

Audio embedded below.

Within five days of each other in late March and early April 2026, Athora completed its £5.7bn acquisition of Pension Insurance Corporation (PIC) and Brookfield Wealth Solutions closed its £2.4bn takeover of Just Group. Two of the UK’s six established bulk purchase annuity (BPA) writers have passed into the hands of North American asset managers backed by Apollo and Brookfield respectively.

The instinctive reaction from some public equity investors that I have spoken to has been to ask whether this marks the beginning of the end for the listed players. If global asset managers with deep pockets and proprietary investment capabilities are acquiring BPA platforms, the fear runs, then Legal & General, Aviva and Standard Life will eventually be outcompeted on pricing, squeezed on margins and left behind.

I do not think that is the right conclusion, and this article sets out why. The market is too large, the pipeline too deep and the regulatory constraints too binding for private capital simply to displace the incumbents. What these deals do change, however, is the nature and intensity of competition in a market that was already becoming more demanding.

Indeed, one of the less obvious consequences may be positive for the listed players. If stronger competition slows the relentless reinvestment of capital into new BPA business, more of the cash generated by mature back books may finally reach shareholders through dividends and buybacks. Ironically, the arrival of private capital may help impose exactly the capital discipline public equity investors have long wanted to see.

For what it is worth, I have been writing for over a decade, first at RBC Capital Markets and now through this newsletter, that UK bulk annuities represent the best structural growth opportunity in European insurance. These transactions confirm that assessment rather than challenge it.

Announced last summer, real this month

When Brookfield first signalled interest in Just Group in the summer of 2025, it looked like an opportunistic bid for a company that had long traded at a large discount to book value.

The logic at the time was clear enough. The attraction was not the reported earnings, which are often volatile and misunderstood, but rather the combination of long-duration liabilities and the asset base that sits behind them. Brookfield offered 220p per share, a 75% premium to Just Group’s undisturbed price, valuing the company at £2.4bn or roughly 1.1x own funds.

What has changed since then is the number of players reaching the same conclusion. Athora’s separate £5.7bn acquisition of PIC, with Apollo providing asset management capabilities, followed a similar logic at a much larger scale. In addition, Legal & General entered a strategic partnership with Blackstone covering up to $20bn of asset origination. What looked like an opportunistic bid in isolation now looks like a repeatable strategy being pursued simultaneously by several of the world’s largest alternative asset managers.

Why asset managers see what equity investors missed

Bulk annuities are typically described as an insurance product, but that framing obscures the economics that actually matter. A bulk annuity is a transaction where an insurer takes on the pension liabilities of an entire defined benefit (DB) scheme: a scheme where the employer guarantees a specific retirement income, regardless of investment performance, in a single transaction.

Each transaction brings with it a large pool of long-term assets that need to be invested for decades. The liabilities effectively lock those assets in place. The economics of the business are therefore driven not just by the underwriting margin at the point of sale, but by the returns generated on those assets over time. Just Group alone manages £30bn of pension savings; PIC had roughly £55bn of assets at the end of 2025.

That is why this market looks different through the lens of a global asset manager. The BPA business, viewed properly, is a long-duration, predictable, captive asset management opportunity with the insurance wrapper serving primarily as the mechanism that locks in the capital. The liabilities bring the assets, and the assets drive the returns.

The US private credit playbook does not work here

There is a tendency to view this through the prism of US private credit concerns, but that is the wrong starting point. Only last week, Jamie Dimon warned that losses in private credit may prove higher than markets currently expect when the cycle turns, reflecting what he sees as weaker underwriting standards and overly optimistic assumptions.

That builds on his now famous “cockroach” warning last year, when he cautioned that “when you see one cockroach, there are probably more.” Those concerns may prove justified in parts of the US market. However, applying that same narrative directly to UK bulk annuities is overly simplistic.

The UK regulatory framework, particularly the matching adjustment (MA) regime (which allows insurers to recognise the illiquidity premium on assets backing long-term annuity liabilities), imposes clear constraints on what can be done. Assets in the MA portfolio must have fixed or predictable cashflows, must be held to maturity, in practice are often denominated in the same currency as the liabilities, and must be assigned a credit rating. The PRA sets the rules to determine the fundamental spread for each asset, which represents the compensation for expected default and downgrade risk that the insurer cannot book as MA benefit. UK BPA assets are predominantly investment grade fixed income and secured lending, not the leveraged credit and CLO structures that dominate US private credit concerns.

That means equities, hedge funds, leveraged credit and actively traded portfolios are all ineligible. Moving down the credit spectrum does not help as much as you might think, because the fundamental spread deduction claws back some of the compensation for taking more credit risk. Offshore or unrated assets require internal model approval from the PRA and face close scrutiny. The regime is deliberately designed to prevent insurers from reaching for yield at the expense of policyholder security.

Investors cannot simply increase risk to increase returns in this market. The PRA has been tightening its scrutiny of funded reinsurance arrangements throughout 2025, and the Life Insurance Stress Test (LIST) results published in November 2025 provided the market with the most granular view yet of insurer resilience under severe stress scenarios.

What the new owners can genuinely bring

If the US private credit playbook is constrained, the question becomes: what can Brookfield, Apollo and Blackstone actually do within the MA framework that the listed players currently cannot?

The answer is narrower than the headlines suggest, but it is real. The primary edge sits in direct origination of MA-eligible assets at wider spreads than are available in public markets. These firms see thousands of private transactions a year across their global platforms. They can source infrastructure debt, social housing loans, private placements, and secured lending directly, cutting out intermediary margins and capturing the full illiquidity premium.

I would estimate that a Brookfield or Apollo can originate a £500m infrastructure loan at gilt +180bps that a listed insurer might have to buy in the secondary market at closer to gilt +140bps. That differential may not sound dramatic, but over a £30bn asset portfolio, an additional 40bps of annual spread compounds into meaningful value over decades. The primary premium reflects illiquidity and the value of originating and structuring assets, with additional variation driven by complexity, execution certainty and market conditions.

They can also manufacture structured assets tailored to the liability profile. Taking pools of receivables, loans, or infrastructure cashflows and restructuring them into MA-eligible fixed cashflow securities is a form of asset engineering that plays directly to their skillset.

The PRA’s Solvency UK reforms (PS10/24) expanded the range of eligible assets, most notably by allowing assets with highly predictable, rather than strictly fixed, cash flows, enabling greater use of infrastructure and private credit investments.

Beyond origination, they also bring a broader global sourcing network. That can be an advantage because UK annuity writers need large volumes of long-dated assets, while the domestic sterling market is not deep enough on its own. Access to North America, Asia-Pacific and other markets widens the opportunity set. The benefit, however, depends on how efficiently those assets can be hedged back into sterling and structured to qualify for matching adjustment treatment. Where that can be done well, it may improve cashflow matching and reduce the drag from holding lower-yielding assets.

Finally, there is the question of patience. These are firms with deep pockets and long time horizons. They can afford to price new BPA business aggressively in the short term, accepting thinner underwriting margins at inception, because they expect to earn the return on the asset side over 20 to 30 years. A listed insurer with half-yearly earnings pressure cannot easily do this.

The honest assessment is that the edge is real but incremental rather than transformational. The existing asset portfolios were built under the previous ownership, and the new owners’ advantage kicks in gradually as new business is written and sourced through their platforms. Over time, as the back book rolls off and the new book grows, the asset mix shifts. The competitive impact is a slow burn, not a step change, which is another reason the listed players have time to respond.

New owners, same platforms

It is important to be clear about what these transactions represent.

The buyers are not building insurers from scratch; they are acquiring established UK platforms with existing teams, systems and regulatory approvals. PIC has been writing BPA business since 2006 and has over 400,000 policyholders. Just Group has over 700,000 customers and a well-established position in both the BPA and individual annuity markets.

From a trustee perspective, very little changes on day one. The same entities are writing business, and the same capabilities are in place. What changes is how those platforms are used, because the asset strategy behind the same underwriting capability can be very different under new ownership. Brookfield’s plan to merge Just Group with its UK subsidiary Blumont Annuity Company and run the combined entity under the Just brand tells you where the strategic emphasis sits.

Will trustees trust the new owners?

There is a question that the market data will not answer, and it is one I think matters: how will pension fund trustees respond to North American-owned counterparties?

I have seen this dynamic before. When I was at Standard Life in the mid-2000s, there was a real concern that US insurers such as AIG and Hartford would enter the UK market with variable annuity products offering generous guarantees. These products, which combined equity exposure with downside protection or income guarantees, appeared highly competitive and were seen as a potential threat to UK incumbents.

However, the financial crisis exposed the true cost of these guarantees. Hedging strategies proved far more expensive and less reliable than expected, leading to significant losses. US insurers retrenched, and the anticipated wave of guaranteed products in the UK never materialised. In my experience, the US entrants of that era left little lasting mark on the market.

The situation today is different in important respects. Brookfield and Apollo are not launching untested platforms; they are acquiring established UK businesses with long track records, PRA-regulated balance sheets, and hundreds of thousands of existing policyholders. The management teams, the regulatory capital, and the operational infrastructure all remain in place.

That said, I expect the listed incumbents to use the change of ownership as a competitive point in trustee pitches. Trustees are inherently conservative, pension consultant recommendations carry significant weight, and the message that “we remain UK-listed, UK-regulated, and accountable to public shareholders” will resonate with some decision-makers. Whether that concern is fully rational is beside the point; it is real, and it will affect how business is allocated, at least in the near term.

The new owners will need to earn trust through execution, consistency, and visible commitment to the UK market over a period of years. That is achievable, but it is not automatic.

£350bn to £550bn over the next decade

The natural assumption is that more players means more competition for a fixed pool of business, but the numbers tell a different story.

According to Hymans Robertson, 370 buy-ins were completed in 2025, a record and up from 307 in 2024. Total volumes were £38.2bn, down from £47.8bn in 2024 and below the 2023 peak of £49.1bn. That reflected not just a shift towards smaller transactions, but also the impact of higher interest rates, which reduce the premium required to insure a given set of liabilities. Of the 370 buy-ins completed in 2025, 307 were £100m or smaller. The largest transaction of the year was Legal & General’s £4.6bn buy-in for the Ford pension scheme.

Looking ahead, LCP forecasts BPA volumes of £40bn to £55bn in 2026, with record volumes possible if current pricing conditions persist. Willis Towers Watson (WTW) goes further, projecting total pension risk transfer volumes of £70bn in 2026 (including longevity swaps), with the BPA component alone expected to exceed £50bn.

The pipeline behind these numbers is substantial. UK DB pension schemes held £1.137tn of assets at end March 2026, against liabilities of £931bn, implying an aggregate surplus of around £206bn and a funding ratio of 122%, according to XPS.

In addition, the Pensions Regulator estimates that 54% of DB schemes are now funded at or above buyout level, creating a growing pool of schemes that can afford to transact.

Looking further out, LCP projects cumulative BPA volumes of £350bn to £550bn over the next decade. To put that in context, total cumulative volumes since the BPA market began only crossed the £300bn mark at the end of 2025. The next decade could see the entire history of the market repeated, and then some.

For many years, the limiting factor has been insurer capacity rather than demand. In that context, the arrival of new capital is not simply displacing existing players but increasing the system’s ability to transact.

More competitive at the small end, still concentrated at the top

Competition increased through 2025, with a record 370 buy-ins completed during the year and transaction numbers rising by more than 20%, driven mainly by deals below £100m. The data suggest that competition is broadening in the small and mid-market segments, with more insurers participating below £100m and many sharpening their small-scheme propositions. Aviva, Just and L&G together accounted for around 71% of all transactions by number, while M&G, Royal London and Utmost also continued to build their presence in the market, according to Hymans Robertson.

Source: Hymans Robertson Bulk annuity and longevity hedging report - H2 2025

By contrast, the largest transactions remain fewer in number. The market saw at least 15 buy-ins of £500m or more in 2025. This is the part of the market where the new entrants’ asset capabilities could have the greatest impact over time.

Source: Hymans Robertson Bulk annuity and longevity hedging report - H2 2025

More capital, combined with stronger asset capabilities, will make pricing more competitive at the margin and increase the importance of what happens after the deal is written. Asset returns are becoming a more important driver of overall profitability than the terms agreed at inception.

I do not think this is a market where returns collapse; the regulatory framework and capital requirements provide a degree of discipline. It is, however, clearly becoming a more demanding environment in which to operate.

The differentiator has moved to the asset side

The most important shift is where value is created.

Historically, BPA transactions were competed on underwriting, pricing and balance sheet capacity. Increasingly, the differentiator is the ability to generate returns on the assets backing those liabilities, which is a fundamentally different type of competition. It favours business models that can originate, structure and manage assets more effectively within the same regulatory constraints.

The underwriting capability across the market is well established. The differentiation is moving to the asset side, and that is precisely where Brookfield, Apollo and Blackstone have their strongest credentials.

What this means for listed insurers

I do not think listed insurers are going to be competed out of this market. The opportunity is too large and the pipeline too deep for that outcome.

I do think the competitive environment has shifted in a way that demands a response. The average premium per BPA transaction in 2025 was £103m, but that average conceals enormous variation. Standard Life had the highest average deal size at £391m, followed by Rothesay at £304m and Legal & General at £227m. At the other end, Just Group dominated the market by transaction count (around 35% of all deals) but wrote only around 8% of total premiums, with an average deal size well below the market average. Legal & General, by contrast, completed roughly 12% of transactions but captured around 27% of premiums.

These are fundamentally different business models operating in the same market. Legal & General and Standard Life are competing for larger mandates, while Just Group is processing volume at the small end. Aviva sits somewhere in between, with around 23% of transactions and 12% of premiums.

I expect one consequence of the change of ownership is that both Just Group and PIC may increase their average deal size. Brookfield and Apollo bring asset origination capabilities that are most valuable on larger, more complex transactions, and both new owners will have a strong incentive to deploy their investment platforms at scale. PIC already skews towards larger deals; Just Group, which has historically dominated the sub-£50m segment, may shift its mix towards bigger mandates over time. If that happens, it would ease competitive pressure at the smaller end of the market, precisely the segment where the listed players and newer entrants are most active.

The likely outcome is a more segmented market, where different models coexist. Some players will lean more heavily into asset origination and integration, while others will focus on discipline and execution. There is room for both approaches, but the bar has clearly been raised.

The Hidden Upside of More Competition

There is also a less obvious consequence of increased competition that could actually improve the investment case for the listed players. One of the persistent complaints from public equity investors has been the lack of visible free cash flow from listed UK life insurers. The reason is straightforward: writing new bulk annuity business is capital-intensive, and historically the cash generated from back books has been recycled straight into new business, never reaching shareholders.

If increased competition slows new business volumes for the listed writers, that capital-hungry reinvestment cycle eases. The back books continue to generate cash regardless, the liabilities ‘run off’ predictably over decades. More of that cash flow becomes available for dividends and buybacks, which is exactly what public equity investors want. The irony is that the arrival of private capital competitors, which the market instinctively views as negative, could actually force the kind of capital discipline that makes the listed insurers more attractive to their own shareholders.

If the valuation gap persists, more bids will follow

If these businesses are attractive to private capital, it is hard to argue that the Athora/PIC and Brookfield/Just transactions will be the last. Indeed, Utmost’s life and pensions business was acquired by US-based JAB Insurance shortly before Christmas 2025, representing a third transaction in quick succession.

BPA platforms are not easy to build. They require regulatory approval, operational infrastructure, long-established relationships with employee benefit consultants and pension fund trustees, and a track record that takes years to develop, which means acquiring an existing platform provides immediate access to all of that, along with the liabilities and assets that sit behind it.

At the same time, listed UK life insurers continue to trade at valuations that do not fully reflect the long-term economics of the business, particularly when viewed through an asset-driven lens. Brookfield paid about 1.1x unrestricted Tier 1 own funds for Just Group, a meaningful premium to where the stock had traded for years. Put those two things together, and further approaches look entirely plausible.

Enough for everyone, provided the incumbents raise their game

My view is that this is not a disruptive moment, but it is an important one.

The bulk annuity market remains, in my view, one of the most attractive structural growth areas in European insurance, a view I have held consistently for more than a decade. It has grown by over 20% per annum by transaction count, which I believe is the most meaningful measure given that rising interest rates can distort reported deal volumes. It has genuine duration and generates value over time in a way that public markets have often underappreciated. The fact that Brookfield, Apollo and Blackstone have all made significant commitments to this market within a matter of months is powerful validation of that assessment.

What has changed is the level and type of competition. New owners bring different capabilities, particularly on the asset side, and that will make the market more competitive for larger transactions while placing more emphasis on asset execution.

I do not think this becomes a zero-sum market where incumbents are pushed out, because the opportunity is simply too large for that. With £350bn to £550bn of projected BPA volumes over the coming decade, there is more than enough business for well-positioned listed and private players alike. Instead, I expect we see a market with more capital, more participants and clearer differentiation between business models.

The question is no longer whether bulk annuities are attractive, but who captures the value over the next phase of the market.

Want a deeper dive on UK life insurers, annuity balance sheets, and why markets often misprice them in stress? That is the core theme of my book, Breaking Down the Insurance Black Box.

buy the book

Gordon Aitken runs Aitken Advisory, providing strategic advice on UK and European life insurers and pension funds. I work with investors, insurers and advisers on transactions, capital strategy and market positioning. If you would like to discuss a potential engagement, please get in touch.

Disclaimer

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.

Audio embedded below.

I want to make the case for reinstating embedded value as the primary valuation framework for UK life insurers. Over the past decade, the industry has quietly abandoned the only valuation tool purpose-built for life insurance economics, and in my view that decision has left equity investors materially worse off. I believe the abandonment of embedded value has contributed directly to the persistent underperformance of the UK life insurance sector.

The market has moved to valuing insurers off Solvency II own funds (the regulatory measure of an insurer’s available capital), which are by definition a smaller number than embedded value, yet the valuation multiples have not adjusted upwards to compensate. The result is that the sector looks optically fairly valued on a price-to-book basis, while the true economic value of these businesses remains hidden.

Meanwhile, private capital buyers are circling UK life insurers and I expect are using EV-like frameworks to price their bids, building discounted cash flow (DCF) models on the in-force book and on new business, while the public market shareholders being asked to sell no longer have the data to judge whether those bids are fair.

The deal that started it all

In 1989, AMP launched a hostile bid for the UK’s Pearl Group, and for the first time in a public takeover battle, embedded value was used as the primary valuation tool. Pearl’s board published a defence document that included an embedded value calculation, produced by consulting actuaries at Tillinghast (the actuarial consulting arm of what is now Willis Towers Watson), arguing the company was worth 765p per share. As a result, AMP increased its bid by 85p to 690p to acquire Pearl. It was the moment embedded value moved from actuarial theory to deal-making reality.

I have spent more than 25 years working with embedded value, and in my view I watched the market talk itself out of using the best valuation tool it ever had. When I started as a sell-side equity research analyst covering insurance at Credit Suisse First Boston (CSFB) in 2000, the default method for valuing a UK life insurance business was embedded value plus 20 times new business profit (the embedded value created by policies sold in the current year). For an Asian insurance business which Prudential owned, the new business multiple could be 40x, and the stock traded at around 3x embedded value at its peak.

Even a predominantly UK insurer like Legal & General commanded a significant premium. In September 1999, NatWest offered 210p per share in a friendly £10.75bn bid for L&G. L&G’s embedded value was just under £1 per share at the time, as I recall, implying a multiple of roughly 2.1 to 2.3 times embedded value. The deal never completed (it was the catalyst for Bank of Scotland’s hostile bid for NatWest, which in turn brought RBS into the picture), but the price NatWest was willing to pay gives an indication of how highly the market valued life insurance franchises when embedded value was the common language.

Here’s a databox from a report of mine on L&G from July 2001. You can see the share price at the time of 165p materially exceeds the end-2000 embedded value of 126p.

If embedded value did not exist, I believe smart fund managers would invent it. It is, at its core, nothing more than a discounted cash flow on the existing business. Every other industry uses DCF to value companies; embedded value is simply the insurance-specific version. The critical distinction, and the reason insurers are permitted to use it while asset managers are not, is that life insurance business cannot leave.

When a pension scheme transfers its assets and liabilities to an insurer, pension risk transfer, that business can never move. The same is true for an individual annuity. Once someone exchanges a lump sum for lifetime income, that is it. No switching, no upgrades, no renegotiation. The insurer owns that business until the last payment is made. It is the financial world’s one way door. A with-profits policyholder (holders of traditional savings policies that share in the insurer’s investment returns) faces surrender penalties. I wrote about this structural advantage in The Most Permanent Business in a Temporary World.

If you are an asset manager, your clients can walk out the door tomorrow, so you cannot capitalise future revenues. With a life insurer, the business is contractually locked in, which means you are allowed to show the present value of those future cash flows. That is all embedded value is.

Think of it this way. When BP reports its results, it discloses its proven oil and gas reserves: the future production it has the right to extract and sell. Nobody would dream of valuing an oil company without that disclosure. Analysts build a DCF on those reserves, discount the future cash flows, and arrive at a net asset value. The reserves are independently audited and reported annually. Embedded value is the insurance equivalent of proven oil and gas reserves: the future profits locked inside the existing policy book, independently reviewed by consulting actuaries. When the industry stopped reporting embedded value, it was as if BP told investors to value the company without knowing how much oil and gas it had left.

The credibility crisis

The problem started when the industry tried to improve the framework and ended up destroying confidence in it. The CFO Forum (a group of chief financial officers from Europe’s largest insurers) introduced European Embedded Value (EEV) around 2004 to standardise assumptions across companies, then Market Consistent Embedded Value (MCEV) in June 2008 to impose market-implied discount rates. The intention was good; the execution was a disaster. The timing of MCEV could hardly have been worse: it launched just months before Lehman Brothers collapsed in September 2008, and applying market-consistent discount rates in the middle of the worst financial crisis in a generation produced embedded value figures that swung wildly and looked absurd. The GFC effectively killed MCEV’s credibility before it had even been properly adopted.

I sat in meetings with fund managers who said, in so many words: “You told me the old embedded value was fine. Now you’re telling me this new MCEV is more prudent, which means the old one must have been aggressive. I don’t know what to believe anymore.” The irony is that both frameworks were valid for different purposes, but, in my view, the industry did not manage the transition well. The CFO Forum added to that: in April 2011, it withdrew the intention that MCEV should be the only recognised format of embedded value reporting, citing the uncertainty around Solvency II and IFRS. That was the moment, in my view, the industry gave up on convergence.

There is a deeper structural point here. Throughout the 1990s and into the early 2000s, actuaries ran insurance companies without exception. They understood embedded value instinctively because it is an actuarial construct. From around 2010 onwards, non-actuaries increasingly took the top jobs, and the appetite for producing and explaining a complex actuarial valuation framework to boards and investors diminished. Embedded value was increasingly seen as a legacy construct rather than a management tool, and when Solvency II (the EU-wide insurance regulatory regime that took effect in 2016) offered an excuse to stop publishing it, most companies took it.

What got lost

When Solvency II arrived on 1 January 2016, most UK and European insurers stopped publishing embedded value because they assumed that own funds did the same job. In my view, they do not. Solvency II own funds are a regulatory capital measure, not a valuation measure. The risk margin (a regulatory capital charge intended to reflect the cost of transferring insurance liabilities to a third party) is a prescribed, mechanical calculation that bears no relationship to economic value. IFRS 17 (the international accounting standard for insurance contracts, introduced in 2023) introduced a contractual service margin (CSM), which represents unearned profit from insurance contracts and is conceptually closer to the value of in-force business, but it is released on an accounting pattern that obscures the real economics.

The shift has had a direct impact on how the sector is valued. Deals and market valuations used to be priced off embedded value. They are now priced off Tier 1 unrestricted own funds (the purest form of shareholder equity capital, excluding subordinated debt), typically a smaller number than embedded value. Own funds include elements of future profits from the in-force book, but they capture them through a regulatory balance sheet framework rather than as an explicit measure of the present value of future shareholder cashflows. As a result, they give investors less visibility on the scale, timing and source of value emergence from the in-force book. Embedded value made that in-force value much more explicit. VIF, the present value of future profits from policies already on the books, is in my view the most valuable component of a life insurer’s economics.

In my view, investors have not adjusted the valuation multiple to reflect the fact that they are now applying it to a smaller base. They are effectively using the same price-to-book type multiples they would have applied to embedded value, but applying them to a number that reflects the economics of the in-force book less explicitly and less transparently than embedded value did. In my view, that is one of the key reasons the UK life insurance sector has persistently underperformed: the valuation framework has shrunk, but the multiples have not adjusted upwards to compensate.

Rothesay is the only UK life insurer that reports both MCEV and Solvency II own funds, which gives us a rare opportunity to compare the two frameworks side by side.

At year-end 2025, Tier 1 unrestricted own funds represented just 72% of MCEV, down from 77% in 2024 and 79% in 2023. The ratio has fallen because MCEV has grown faster than the Solvency II balance sheet: MCEV rose from £7,500m to £8,039m over the period while Tier 1 unrestricted own funds actually declined from £5,932m to £5,819m. The divergence reflects the fact that new business adds economic value (captured in MCEV) while simultaneously consuming solvency capital. Additional RT1 issuance (a form of subordinated debt that counts as regulatory capital) in 2025 also shifted capital from the unrestricted to the restricted tier.

If Rothesay were a listed company, this distinction would matter enormously for valuation: an investor valuing the stock on Solvency II Tier 1 unrestricted own funds would have seen a 2% decline over two years, while one valuing on MCEV would have seen a 7% increase.

It is a useful reminder that Solvency II surplus is a regulatory measure of capital strength, not a measure of economic value, and the gap between the two is widening.

When I was investor relations director at Standard Life, I persuaded the company to publish a maturity profile of the PVIF (the present value of in-force business), showing what proportion of the in-force value converted to cash over time. The slide from the 2007 results showed the breakdown in five-year blocks: half of PVIF converted to cash within five years, and 75% within ten. That gave investors real visibility on the predictability of future cash flows.

Source: Standard Life plc 2007 results presentation

My Proposal: Making Embedded Value Understandable Through Earnings

Around 2009, I pushed to take this a step further. We were already disclosing PVIF as a single number, £Xbn of value embedded in the existing book, but I could see that this was an abstract concept for most investors. My proposal was to translate it into something far more tangible, a year-by-year profile of the earnings expected to emerge from business already written.

In year one, the contribution would be highest. In year two, slightly lower. In year three, lower again, as the book runs off. Crucially, new business contributed relatively little to total profits, so this would have made clear that the majority of earnings were already effectively pre-determined. The aim was not to forecast growth, but to demonstrate that a large proportion of future earnings was already locked in and highly predictable.

That would have made the economics of the business far easier to understand and, in my view, would have helped rebuild trust and confidence in the sector, not just supported valuation multiples.

That was where the pushback came. It was seen as looking too much like a profit forecast.

In a sense, they were right. In any given year, the vast majority of a life insurer’s profits come from the existing back book, not from new business. The cash flows are that predictable.

The irony is that by abandoning embedded value, the sector discarded the most powerful demonstration of earnings quality it ever had.

I would argue that the companies that still report embedded value are the ones investors understand best. AIA, Prudential plc, and St James’s Place all continue to publish on an EV basis, and the table below shows where they currently trade relative to their embedded value per share.

As mentioned above, Rothesay published its MCEV at £8.0bn for FY2025 but is not listed, so a price-to-EV comparison is not available. Even St James’s Place, a wealth business rather than a traditional life insurer, still publishes on an EEV basis. SJP’s decision to maintain EEV is particularly telling: it recognises that embedded value captures the long-term economic value of its adviser-led model better than IFRS alone, even though its business looks more like asset management than insurance. If SJP can justify EEV at a persistency rate (the proportion of policies or assets that remain with the provider from one year to the next) of around 95%, the case for workplace DC providers is at least as strong, given that member inertia in auto-enrolled pension schemes (the UK system that automatically enrols employees into workplace pensions) typically produces even higher retention rates.

The acquirers still use it

The ultimate validation of embedded value comes from the M&A market. When Apollo and Athora look at PIC, or Brookfield looks at Just Group, they are, in line with standard corporate finance practice, building discounted cash flow models on the existing business and on future new business. Whether they call it embedded value or not, they are doing the same calculation. That is embedded value by another name.

The UK back book deal market has historically priced at 70-80% of embedded value, a convention stretching back through Clive Cowdery’s Resolution deals and into the current cycle. You can see that from this chart from a report I wrote on Phoenix Group (now Standard Life) back in 2016.

Source: Author’s own research

More recently, deals have been priced against Solvency II own funds rather than EV, which itself reflects the shift away from EV disclosure.

The irony is that the buy-side investors being asked to tender their shares no longer have the embedded value data to judge whether the bid price is fair. Without the disclosure, shareholders are flying blind. The acquirer has the information advantage, and the selling shareholder does not.

I would love to bring it back

Embedded value is not perfect. It depends on management assumptions about mortality, persistency, expenses, and discount rates. This is a fair criticism, but it applies equally to every DCF in every industry, and actuaries have better data on which to base their assumptions than almost any other forecasting profession. The assumptions are best estimates, grounded in a huge amount of analysis, disclosed publicly, reviewed by independent consulting actuaries, and capable of being sensitised.

I have always found there is a common scepticism amongst investors that the CEO or CFO can influence the assumptions. In practice, the year-end assumptions tend to be set in November by a group of actuaries working through a structured, evidence-based process. The perception is that the CFO or CEO knocks on the door and says, “change this assumption.” From my experience of working inside Standard Life, that simply does not happen. The actuarial process is rigorous and independent, reviewed by an independent actuarial board, and there is no interference from management. The idea that a CEO can pick up the phone and adjust the discount rate is a misunderstanding of how embedded value is produced.

IFRS 17 and Solvency II are no less assumption-dependent; they simply hide the assumptions in different places.

Listed UK life insurers should, in my view, reinstate embedded value disclosure. It would improve analyst coverage quality, shareholder understanding, and M&A price discovery. It could also help re-rate the sector by giving investors a proper measure of economic value to price off, rather than the smaller Solvency II own funds base that currently understates the value of these businesses. If AIA, Prudential, Rothesay, and St James’s Place can justify the effort, L&G, Aviva, M&G, and Standard Life have no excuse. If acquirers are valuing these businesses using EV-like frameworks, equity investors deserve the same information.

Want a deeper dive on UK life insurers, annuity balance sheets, and why markets often misprice them in stress? That is the core theme of my book, Breaking Down the Insurance Black Box.

Buy the book

Gordon Aitken runs Aitken Advisory, providing strategic advice on UK and European life insurers and pension funds. I work with investors, insurers and advisers on transactions, capital strategy and market positioning. If you would like to discuss a potential engagement, please get in touch.

Disclaimer

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.

Audio is embedded below.

The UK 10-year gilt yield has touched 5%, the highest since 2008. UK life insurer share prices have fallen sharply. Aviva is down 11% year to date, L&G down 10%, and Standard Life down 10%. The pattern is consistent across the European insurance sector, with Allianz and Zurich also down 10% or more. Just Group (+1%) is the notable exception among UK names, supported by the imminent Brookfield acquisition.

In the chart below, I have plotted the FTSE 350 Life Insurance sector relative to the FTSE 100 against the 10-year gilt yield over the past 13 years. Right now, we are in a period of negative correlation: gilt yields are rising sharply while life insurance stocks are underperforming the broader market. I have marked this with a negative symbol on the far right of the chart.

What may surprise you is that higher yields have historically helped the sector more than they have hurt it.

Let me explain the chart:

• 2012 - 2021: Mostly a positive correlation between sector relative performance and gilt yields.

• 2021 - 2024: The relationship flips to a negative correlation. Yields rise and the sector underperforms.

• Sep 2024 – End 2025: Positive correlation. Yields moved from 3.8 to 4.7%, and the sector rallied.

• End 2025 to today: Negative correlation. Gilts sold off again towards 5.0%, sector underperformed.

Why the sell-off is happening

The reason is straightforward. When investors value any stream of future cash flows, whether dividends, earnings, or free cash flow, they discount it back to the present using a discount rate. That discount rate is typically the risk-free rate plus a risk premium. The risk-free rate has gone up sharply as gilt yields have spiked, and the risk premium has arguably increased as well given the geopolitical uncertainty. Higher discount rates mean lower present values, which means lower share prices. This is a general effect that applies to all equities, not just insurers.

For insurers specifically, investors often see an additional concern. When gilt yields rise, bond prices fall. Life insurers hold enormous bond portfolios. The instinctive conclusion is that rising yields must be bad for insurers, reducing the value of their assets and weakening their balance sheets.

The longer-run picture tells a different story

As the chart shows, the current negative correlation is not the norm. For much of the past 13 years, the relationship between gilt yields and life insurance relative performance has been positive: when gilt yields rise, life insurers outperform the broader market, and when yields fall, they underperform. The positive correlation has been the dominant pattern for more of the period than the negative one.

This makes sense, because higher interest rates tend to be good for life insurance businesses. There are several reasons for this, and I will set them out below.

Both sides of the balance sheet move together

A life insurer’s balance sheet has two sides. On one side, the asset side, sit the bond and credit portfolios. On the other sit the long-duration pension and annuity liabilities, the promises to pay policyholders for decades to come. The value of those liabilities also depends on interest rates. When yields rise, the present value of those future payments falls, just as the bond portfolio falls. The two sides of the balance sheet largely offset each other.

The UK regulatory framework requires bulk purchase annuity (BPA) writers to hold assets that closely match the duration and cashflows of their liabilities. The result is that a parallel move in interest rates flows through both sides of the balance sheet in approximately equal measure. Rising gilt yields do not destroy value for a well-matched annuity book. They are largely neutral.

Capital surpluses are stable, solvency ratios actually improve

If rising rates were genuinely damaging, you would see it in the capital surpluses. Most life insurers provide the impact of a 100bps rise in interest rates on the Solvency II capital surplus.

The surpluses barely move. L&G’s £7.0bn surplus increases by just £0.1bn if rates rise 100bps. Aviva’s £7.1bn surplus increases by £0.2bn. Standard Life’s £3.6bn surplus is essentially flat. M&G’s sensitivity tells a similar story: a 50bps fall in nominal yields moves the shareholder Solvency II ratio from 242% to just 238%, a reduction of just 4 percentage points.

The coverage ratios improve when rates rise: L&G gains 11 percentage points, PIC gains 19 percentage points, and Aviva gains 7 percentage points. There is a straightforward mathematical reason for this. When both assets and liabilities fall in value but the surplus (the gap between them) stays broadly constant, the ratio of own funds to required capital improves because the required capital itself shrinks. The Solvency Capital Requirement is tied to the size of the balance sheet, and a smaller balance sheet means a smaller capital requirement. Rising rates mechanically strengthen the solvency ratio, not weaken it.

It is also worth noting that when the PRA designed its 2025 Life Insurance Stress Test, the interest rate shock it chose was a 150bps fall in nominal rates, not a rise. The regulator’s own assessment of what constitutes a severe but plausible stress for UK life insurers is a world where rates go down, not up. I covered the LIST results in more detail in a previous article Have UK life insurers parked the bus on solvency?

Higher rates are positive for new business

In the BPA market, transactions are priced relative to gilt yields. When gilt yields are higher, the cost of securing pension benefits through a buy-in or buyout falls, because the insurer can invest the premium at a higher yield to meet the same stream of future payments.

The y-axis for this chart from LCP is notable: it shows the implied yield on a buy-in relative to the gilt yield.

Higher gilts make buyouts more affordable for pension scheme trustees, which brings more schemes to the point where they can transact. This is a major reason why the BPA market has been running at £40bn+ pa in recent years. LCP expects UK buy-in volumes to reach between £40bn and £55bn in 2026, with cumulative volumes of £350bn to £550bn over the next decade. Nearly half of UK DB schemes are already estimated to be fully funded on a buyout basis, and the proportion is expected to rise sharply over the next five years.

In the individual annuity market, the effect is even more direct. Higher gilt yields translate into higher annuity rates, meaning retirees receive more income per month for the same premium. This makes annuities a more attractive proposition relative to drawdown, and volumes have responded accordingly. Standard Life reported 20% growth in individual annuity new business to £1.2bn in 2025, and L&G’s retail annuity volumes were £1.8bn. These are growing markets in a rising rate environment, not shrinking ones.

Putting it all together

I hope I have demonstrated that the capital surpluses are robust, and that the solvency ratios mechanically improve when rates rise. The BPA pipeline is strong because higher gilts make buyouts more affordable. The individual annuity market is growing because retirees receive better income. These are the fundamental reasons why, for most of the past 13 years, the positive correlation between gilt yields and life insurance relative performance has been the dominant pattern.

Of course, gilt yields are not rising in a vacuum. They are rising because of an energy shock and inflation fears driven by the Middle East conflict, and there are legitimate concerns about what a prolonged period of elevated energy prices might mean for the broader economy. I covered those macro risks in a separate piece What the Middle East shock actually means for life insurers, pension schemes and asset managers

The current negative correlation between gilt yields and life insurance share prices is explainable, given the broader equity market sell-off and the geopolitical backdrop. History tells us that the relationship is often the other way around. The evidence from the companies’ own sensitivity disclosures confirms it: rising rates are, at worst, neutral and often positive for these businesses. The fundamental picture for UK bulk annuity writers remains strong.

Want a deeper dive on UK life insurers, annuity balance sheets, and why markets often misprice them in stress? That is the core theme of my book, Breaking Down the Insurance Black Box.

Buy the book

Disclaimer
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.

Audio is embedded below.

Legal & General’s share price fell 6.8% on results day. In my view that was because some of the early commentary said the dividend was not covered by earnings. That sounds worrying, but it misses the bigger picture.

After L&G reported 2025 results on 11 March, several investor websites and commentary that I saw highlighted that core operating EPS was 20.93p, below the 21.79p dividend. That is true on the accounting numbers, but it does not mean the dividend is unaffordable.

For a company like L&G, the more important question is how much cash and capital the business generates, because that is what supports dividends over time. The market is focusing on the wrong number, in my view.

I’m using L&G as an example, but it’s a similar story across all of the UK life companies. I highlight L&G because its shares have already been the weakest performer among the major UK life insurance stocks over the last 12 months, so this sort of oversimplified analysis can easily reinforce the wrong conclusion.

The plumbing: how L&G’s dividend actually gets paid

The key point is that L&G does not pay its dividend out of IFRS 17 earnings. Like other insurers, it pays the dividend from the parent company, using cash sent up from its operating subsidiaries. In legal terms, there are two hurdles to paying a dividend: the parent company must have distributable reserves under the Companies Act, and the insurance subsidiaries must be strong enough, from a Solvency II capital perspective, to keep sending cash upstream.

For L&G, distributable reserves are not the real constraint in practice. The holding company is regularly replenished by subsidiary remittances, so the more important question is whether the subsidiaries can continue to upstream cash. In 2025, total subsidiary remittances were £1,855m, compared with a dividend cost of £1,247m, so the dividend was covered 1.49x. Even after including £229m of group debt costs, remittances still covered dividends plus debt servicing by 1.26x.

Source: L&G

That is why Solvency II matters more than IFRS earnings or holding company reserves when judging dividend capacity. Whether subsidiaries can send cash to the parent depends mainly on the strength of their capital position under the Solvency II regime. That is also the lens the regulator uses. The PRA focuses on solvency, capital plans and resilience under stress, not on whether IFRS 17 earnings covered the dividend in a particular year.

L&G also has an additional cushion at the holding company level. It ended 2025 with £2,610m in its treasury assets and other shareholder cash pool, which is the main liquidity bucket available to pay the dividend and meet other holding company costs. That was essentially flat year-on-year, and the group also had access to an undrawn £1.5bn revolving credit facility.

So the real debate is not whether IFRS earnings covered the dividend. It is whether the subsidiaries remain strongly capitalised enough to keep sending cash to the parent. On that measure, L&G looks well placed.

Solvency II operating surplus — 1.23x coverage

On L&G’s main capital measure, the dividend was covered. Solvency II Operating Surplus Generation (OSG) was £1.53bn, or 26.8p a share, against a dividend of 21.8p, so coverage was 1.23x.

That is not the same as cash in hand today, because OSG can include value emerging from long-term insurance business that only turns into cash gradually over time. Even so, it is still a more useful guide to dividend capacity than IFRS earnings, in my view.

On the tougher measure, Net Surplus Generation, which reflects the upfront strain from writing new business, coverage was much tighter and only about £17m above breakeven.

The outlook is improving. L&G expects OSG per share to grow by more than 5% a year, while the dividend is growing by 2%, so cover should build over time. Management says it expects NSG to cover the dividend by 2027, under normal new business strain scenarios.

Why IFRS 17 structurally understates dividend capacity

The gap between IFRS earnings and Solvency II surplus is not a temporary quirk, it is a built-in feature of the accounting for annuity writers like L&G. For example, when L&G writes a profitable bulk annuity deal, the economics are attractive from day one, but IFRS 17 does not let the company show most of that profit straight away.

Instead, the expected profit is parked on the balance sheet and released gradually over the life of the contract, which can be anything from 15 to 50 years. So a profitable deal can create significant economic value upfront, while adding only a small amount to reported earnings in the early years.

Under Solvency II, that value is recognised much earlier. As L&G grows in bulk annuities, the gap between Solvency II surplus generation and IFRS earnings can widen, because more new business value is being created upfront while IFRS 17 only releases it slowly over time. That is why faster growth can make reported IFRS earnings look weaker relative to the underlying economics.

That is why L&G has built up such a large stock of future profit. The biggest part of this is the CSM, or Contractual Service Margin, which is effectively an accounting holding account for profit that has already been created economically but cannot yet be shown in full under IFRS 17. Instead, it is released gradually into reported earnings over many years.

By the end of 2025, L&G’s CSM stood at £12.4bn, within a total future profit stock of £13.3bn. Put differently, L&G’s own measure of “CSM (net of tax) + book value” was 214p per share.

This relatively weak IFRS 17 EPS vs dividend cover issue is seen across the UK life sector. While all life insurers demonstrate comfortable coverage on Solvency II and cash metrics. The board of Standard Life (recently rebranded from Phoenix) explicitly stated: “The Group’s consolidated IFRS shareholders’ equity is not a constraint to the payment of our dividends.”

L&G’s capital position is strong. On a pro forma basis, it had £13.2bn of capital against a regulatory requirement of £6.3bn, leaving it with a 210% solvency ratio and £6.9bn of surplus capital.

Put more simply, L&G has a sizeable cushion above the level of capital it needs to hold. Even after the recent introduction of its target operating range to 160% to 190%, the capital above the top end of that range is still roughly equivalent to about one year of dividends.

That cushion does not just sit there and run down. L&G keeps rebuilding it through normal business activity, generating 26 percentage points of operating surplus each year. New business strain absorbs 14 percentage points of that, and dividends consume a further 18 percentage points.

The 14 percentage points of new business strain sounds alarming, but it is largely an optical effect rather than a real capital drain. The actual cash cost of writing new UK annuity business is currently just ~1% of premium. The ratio impact looks so large because every new deal increases the amount of regulatory capital L&G is required to hold, which makes the denominator of the solvency ratio bigger. A bigger denominator means the reported percentage falls, even though L&G has barely spent any capital. It is the accounting signature of a growing business, not a sign that the balance sheet is being depleted.

L&G’s balance sheet is designed to be resilient. Because the group matches its assets and liabilities closely, market shocks do not flow through in a straightforward way. A 15% property fall or a bout of credit downgrades would hurt solvency, but these would still be manageable, one-off hits, not evidence that the dividend or the capital position is structurally under threat.

Years of evidence: never cut, solvency held

L&G’s dividend record through the last few years has been solid. It paid and increased the dividend every year from 2020 to 2025, including through COVID-19. In 2020 the dividend was held flat, then it grew by 5% a year for the next four years, before shifting to a model of 2% dividend growth plus buybacks in 2025. L&G’s Solvency II ratio also stayed above 175% throughout, which helps explain why management had room to keep returning capital. The broader point is that L&G has not cut its dividend since the Global Financial Crisis.

That compares well with peers, although L&G was not alone. Standard Life and M&G also maintained their dividends through the pandemic, while Aviva was the clear exception, having withdrawn its 2019 final dividend in April 2020 rather than paying it in June 2020.

Over the last six years, L&G has paid approximately £7bn in dividends and generated more than £10bn of Solvency II operating surplus. Its Solvency II ratio ended 2025 at 210%, which is actually higher than the 177% level at the end of 2020.

This period included some very tough conditions. L&G kept its dividend intact through both the pandemic and the gilt market turmoil of September 2022. In fact, during the gilt crisis its solvency ratio rose to a record 236%.

Against that backdrop, the fact that IFRS earnings per share were 0.86p below the dividend in 2025 does not look like a sign of dividend stress. It looks much more like an accounting mismatch than a warning sign.

New business strain: the lever investors are missing

L&G’s bulk annuity business is not putting huge pressure on the dividend. Its UK pension risk transfer business is now being written at around 1% capital strain, meaning the actual cash cost of writing £10.4bn of new UK deals was roughly £100m — a fraction of the £1.5bn of operating surplus the group generates each year.

Where new business does have a visible impact is on the solvency ratio, because each new deal increases the amount of regulatory capital L&G is required to hold. That pushes the ratio denominator higher, which is why new business consumed 14 percentage points of the 2025 SII ratio despite the low strain rate. This gives management a genuine lever: if conditions deteriorated and the board wanted to protect the solvency ratio, it could cut back PRT volumes for a period, significantly slowing the growth in required capital. It could also pull back on international PRT, which runs at a much higher 6.3% strain rate and is therefore far more capital-intensive per £1bn written.

At the same time, the existing book is already doing much of the work. L&G’s in-force business generates around £1bn of surplus each year, helped by the steady release of value from older policies and by investment optimisation. So a substantial part of the dividend is supported by business already on the books. New business adds value too, but more through future profit and capital generation than through immediate cover in year one.

What management said

Management’s message on shareholder returns was very clear. In the analyst Q&A the CEO said “my priority is a sustainable growing dividend and the sustainability of that dividend”. When asked about buybacks, he again made clear that the dividend comes first.

When discussing its new 160-190% solvency ratio range the company stated “At the lower end of this range our dividend is sustainable, and this is not an automatic trigger for capital”. In other words, management is not signalling that shareholder payouts are at immediate risk if solvency moves around within that range.

L&G also said it expects 2026 core operating EPS growth to be at the top end of its 6% to 9% target range. Based on 20.93p in 2025, that points to roughly 22.2p to 22.8p in 2026. That would put earnings at around, or slightly above, the likely dividend level on an IFRS basis as well.

Set against that, L&G has also reaffirmed a record £1.2bn buyback alongside 2% dividend growth. That does not look like the behaviour of a board that is worried about the dividend.

Conclusion

L&G’s dividend looks much better supported than the headline EPS comparison suggests. It is funded by cash sent up from subsidiaries, with that cash covering the dividend by about 1.5 times. It is also covered on the group’s main Solvency II capital measure, by about 1.2 times, and backed by a sizeable £6.9bn surplus capital buffer above the regulatory minimum.

The track record is relevant as well. L&G has kept paying its dividend through six difficult years, including COVID-19 and the 2022 gilt market crisis. That does not mean the dividend is risk-free, but it does suggest the current debate is putting too much weight on the wrong number.

The gap between IFRS 17 earnings and dividend capacity is mainly an accounting issue. For annuity writers such as L&G, IFRS 17 pushes a lot of profit recognition far into the future, even when the economic value has already been created. That is not unique to L&G, it is a feature of the accounting across the sector.

So the real issue is not whether L&G can pay the dividend. My intention in this paper is that I have provided the evidence to suggest it can. The real issue is whether investors will eventually stop judging the shares mainly on an accounting measure that does not reflect how dividend capacity is actually created. With the shares yielding 9.0% (2026E), investors are at least being paid well while they wait.

Want a deeper dive on UK life insurers, annuity balance sheets, and why markets often misprice them in stress? That is the core theme of my book, Breaking Down the Insurance Black Box.

Buy the book

Disclaimer
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.

Audio is embedded below.

Citrini Research’s ‘The 2028 Global Intelligence Crisis’ is deliberately focused on a downside scenario and uses insurance as one of the channels through which the stress spreads, especially US annuity balance sheets funding private credit. I have had a few people ask whether that maps to the UK. My view is that a lot of the private credit anxiety is a US narrative, because the plumbing, ownership structures, and capital regime are different. I’m borrowing their ‘memo from the future’ format to explain why.

This is a thought exercise, written as if it were a memo from June 2028 looking back at 2026.

Macro Memo

The UK life sector in the AI economy

Gordon Aitken

March 3, 2026 June 30, 2028

By mid 2028, we have enough distance to see what actually happened in 2026.

2025 was a turning point for UK life insurers. After years of share price underperformance, the sector finally began to look like it was being rewarded for what it actually is, a cash generative, solvency rich set of businesses with improving capital return stories. The year finished strongly and 2026 started well too, then the narrative shifted again.

The first wave of disruption fears came from outside life insurance. It started with software businesses that sell tools to corporates, where investors began to ask how much of that revenue was genuine differentiation and how much was simply charging a lot for routine workflow. That anxiety then moved along the chain. Insurance brokers came next, followed by wealth managers and investment platforms, where the worry was that AI would compress fees and weaken distribution advantages.

UK life insurers were not at the centre of that storm, but their share prices were hit anyway. It was not because they suddenly became AI losers. It was because a second narrative arrived at the same time and it was easier for markets to trade a slogan than to read a balance sheet. Private credit.

There were high profile voices warning about hidden risks. Jamie Dimon captured the mood with two lines that stuck. “When you see one cockroach, it means there are probably more,” and, in the same vein, “people are doing dumb things.” For investors already primed to look for the next fault line, private credit became the obvious candidate. A few US software related stresses appeared, and the worry quickly broadened from a sector issue into a system story. By late 2026, it started to feel as if the market had decided the next crisis had already been written. If private credit was the new subprime, then surely insurers were in the blast radius, because insurers have large credit books.

Looking back, that was the moment the market got the wrong narrative attached to the right observation.

The observation was correct. UK life insurers do have big credit portfolios, backing long dated annuity liabilities.

The narrative was wrong. The way private credit sits inside the UK system, and the way UK annuity portfolios are constructed, is not the same as the US version investors were reacting to.

In hindsight, the deeper point became clearer.

UK life insurers had their crisis in the early 2000s. That was the period when the sector was forced to confront what it means to promise long-dated guarantees without a genuinely robust risk framework. By 2026, the industry had already spent more than two decades de-risking, professionalising asset/liability matching, and building capital models that explicitly test tail scenarios. The solvency regime, and the stochastic modelling culture that came with it, meant that when markets tried to pin the next crisis on annuity writers, the sector was already operating from a “we have lived through this” mindset.

This memo is an attempt to separate three things that got bundled together in 2026.

• AI changed the economics of parts of the services sector.

• Private credit did face stress in some US pockets, especially where assumptions about recurring revenue and refinancing proved optimistic.

• UK life insurers were treated as collateral damage; they were not.

What most people got wrong in 2026

The bear case was aimed at the wrong point of vulnerability.

UK life insurers are not banks. They do not rely on deposits that can run overnight. Their key constraint is solvency, the size of their capital buffer, not day to day liquidity.

They are not equity beta vehicles either. UK life insurers sold down their equities a long time ago. Direct property exposure is also smaller than most people assume, and often held through secured structures rather than big speculative bets.

So what is left?

The real questions were always about:

• Credit selection, what exactly sits in the annuity portfolio

• Spread regimes, what you get paid for taking credit risk

• Capital discipline, how much buffer you hold and what you do with it

A second misconception sat inside the first. People talked about private credit as if it were one thing, when it is not.

In UK annuity portfolios, a big part of what gets labelled private credit is usually a mix of secured residential lending, equity release mortgages, infrastructure debt, and other secured lending. That still involves risk, but it is very different from a portfolio dominated by leveraged loans to software and private equity deals.

AI did change the world. It did not rewrite the basic arithmetic of how a well built annuity book behaves under stress.

Where the money is actually invested

Before getting to what went right, it helps to look at what sits behind the promise.

Two points are worth keeping in mind.

First, a meaningful share of annuity assets is still plain vanilla. Sovereigns and public corporate bonds. Liquid, transparent, and relatively easy to risk manage.

Second, the big private buckets are not inherently exotic. Secured residential lending, equity release mortgages, and infrastructure are mostly collateralised or contracted exposures, often sitting high up the capital structure.

The most economically sensitive exposure to a white-collar slowdown sits mainly inside the sector mix of corporate credit, plus a slice of other secured lending. That is why credit migration and spread moves still mattered. But the portfolio construction meant the story was always likely to be more about volatility and headlines than about permanent impairment.

What the period revealed about UK life insurers

1. It was never a liquidity story
   The US stress episodes that drove the private credit headlines were fundamentally about confidence and liquidity. That mattered a lot for banks and vehicles exposed to sudden funding pressure. It mattered far less for UK life insurers, because they are not banks, and annuity liabilities do not behave like deposits. Looking back, the irony is that by 2028 most firms could evidence this more quickly than ever, internal dashboards and scenario tools became close to month end rather than annual, and yet the market still preferred the scarier storyline.

2. Equity and property risk stayed limited
   This was not a repeat of everything up to the early 2000s, when insurers were effectively leveraged equity investors. UK life insurers had sold down equity exposure long ago, and direct property risk remained modest and expressed through secured structures rather than speculative bets. Even with political pressure to “buy more UK equities”, most insurers resisted and instead supported UK priorities through infrastructure and long dated secured assets. By 2028, the sector’s market sensitivity was easier to demonstrate because firms could run updated positions through their models far more frequently than they used to.

   

3. Credit issues were mostly downgrades and rotation, not defaults
   There was pressure in pockets, and AI did contribute to it. Certain software and business services models lost pricing power, and a few credits that looked stable in 2025 did not look so stable by late 2026. But the stress expressed itself mainly as rating migration and spread volatility, not a wave of permanent impairment. Insurers did what they have always done, they monitored, trimmed, rotated, and avoided becoming forced holders of deteriorating stories. AI helped at the margin, faster triage, faster covenant monitoring, less time spent reading, but the core driver was still old fashioned credit discipline.

4. Wider spreads became a tailwind
   In 2025, the bigger issue was that spreads were too tight and compensation for credit risk looked thin. Once spreads normalised, forward returns improved, reinvestment economics strengthened, and annuity new business pricing became more attractive. Insurers are long term investors who generally hold to maturity and reinvest cashflows, so a healthier spread environment was supportive. AI did not change the maths, but it did allow pricing teams to run more scenarios faster, which helped the market clear more smoothly when spreads moved.

   

5. Life expectancy did not create a reserve shock
   AI did help the medical profession, speeding up some diagnostics, improving triage, and supporting research. That probably contributed to longevity gains at the margin. But for annuity writers the key question was whether life expectancy would improve faster than already assumed in reserves. By 2028, any uplift looked incremental rather than step change, and outcomes broadly tracked the improvement rates insurers had already allowed for, which meant no material reserve strengthening was required on longevity grounds.

6. Annuities did not lapse
   This point is structural rather than cyclical. Annuities cannot lapse, they cannot be traded, and they cannot be redeemed, so there is no equivalent of a fund outflow or a “run” dynamic. That makes them fundamentally different from many other financial products where customers can exit at short notice. In stressed periods, that liability stickiness gave insurers time to manage the asset side calmly rather than being forced into reactive selling.

7. AI delivered real operating leverage in PRT execution
   The biggest gains were in the unglamorous bottlenecks. For years, bulk annuities were constrained by data cleaning, benefit specification, and administration readiness. AI did not remove the need for controls, and it did not turn a bad dataset into a perfect one by magic, but it changed the workflow. Tasks that used to take months increasingly took hours, sometimes less than a day, with the right governance layered on top. That did not make for great headlines, but it did make for better economics.

   

8. PRT volumes remained very strong
   Execution capacity improved at the same time that sponsor and trustee appetite to de-risk stayed intact, so the market kept clearing at scale. There was not a sudden surge in schemes choosing to “run-on”, despite the excitement in 2025 after high profile transactions like the Stagecoach deal and the broader commentary that a wave of schemes would decide they could capture surplus and stay invested for longer. In practice, most trustees still prioritised certainty once funding allowed it, so buy-in and buy-out volumes remained robust rather than being crowded out by run-on. Longer term market forecasts, such as LCP’s decade view of up to £550bn of PRT volume, still looked broadly on track by 2028, reinforcing that this was a structural market, not a one off post pandemic spurt.

9. The PRA tightened stress testing, and the sector sailed through
   By 2027, supervisors could iterate faster and stress more frequently. Quarterly stress testing became the new rhythm, not because the PRA turned doomsday, but because it became operationally easy to do. The punchline stayed the same. The sector’s solvency buffers and risk management were fit for purpose, and repeated testing made it harder to sustain the idea that annuity balance sheets were a hidden accident waiting to happen.

10. Disclosure got faster, without changing the underlying economics
    By 2028, some firms were publishing month end solvency updates and running more regular internal model refreshes. That narrowed the gap between market moves and reported capital, which mattered in a world where narratives moved quickly. It did not mean solvency was literally real time, but it did mean the old complaint, “we won’t know the impact for six months”, became less true.

11. Private capital kept buying UK annuity platforms
    The deal logic that had been forming through the mid 2020s remained intact. Annuity writers are multi-decade inflow engines, and global asset managers increasingly saw them as permanent clients for asset origination. That included private credit, but in the UK the debate remained more about asset selection inside Matching Adjustment portfolios than about the US style systemic funding loop that drove the loudest headlines.

12. Dividends and buybacks kept rising
    Capital returns stayed central, supporting the valuation case and keeping a ceiling on the “inevitable take private” narrative. The tongue in cheek footnote is that results days turned into an AI arms race. Results still dropped at 7am, and by 7:01 the buy-side was being hit by twenty “20 page” sell-side research notes that read suspiciously like each other. Results meetings became shorter and more virtual. The CEO did not literally appear as a hologram every time, but it sometimes felt that way. The sell-side’s marginal value shifted from speed to judgement, and there was a small renaissance in independent research because judgement became scarcer.

The enduring feature of this period was the gap between headline fear and balance sheet reality. The sector kept generating cash, kept returning capital, and kept writing annuities, even as the market recycled a US private credit narrative that did not map neatly to the UK. That tension, solid fundamentals with a persistent narrative discount, is why the dividend yields stayed high for longer than many expected.

As an actuary, I’ve been told more than once that my job is to make things dull, and in this sector, dull is exactly what you want.

I hope you enjoyed my 2028 memo. It was a fun one to write, and a useful way to step back from the day to day noise. My experience tells me there will always be events that hit UK life insurers’ share prices, I have seen it through the global financial crisis, Brexit, and the pandemic. The initial move is usually negative because markets trade fear quickly, but the underlying businesses tend to be much less affected because they are built for stress and managed with that mindset.

Want a deeper dive on UK life insurers, annuity balance sheets, and why markets often misprice them in stress? That is the core theme of my book, Breaking Down the Insurance Black Box.

Buy the book

Disclaimer
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.

Audio summary is embedded below.

The UK life insurance reporting season kicks off with Just Group on 27 February 2026. Before the UK names report, the Dutch insurers NN Group and ASR Nederland have already published their FY2025 results, and I always find it useful to look there first.

The reason is simple. Dutch life insurers are structurally very similar to UK life insurers. Both markets have large legacy defined benefit pension systems, which means bulk pension transfer and longevity risk transfer are real economic activities in both countries. Both are dominated by capital-intensive life and retirement businesses rather than diversified financial conglomerates.

In many other European markets, listed insurers are split across life, non-life, banking and asset management. The Dutch and the UK don’t follow that model. The listed names in both markets are heavily weighted towards life, retirement and asset management, and those activities are closely connected. Life insurers manage long-term pension promises and take long-term risks. Asset managers invest long-term pension money and earn fees. In practice, they sit in the same retirement ecosystem and are often integrated within the same groups. That is why the equity story in both markets is driven by the same things, capital generation, balance sheet strength and capital return.

The numbers underline the point. NN is roughly 60% life and 21% asset management. ASR is roughly 77% life and 11% asset management. Most UK listed life companies have a similar blend of life, retirement and asset management. The main exception is Aviva. Before the Direct Line deal it was already around 45% non-life, and once Direct Line is consolidated it will be more than half non-life, making it a less direct read-across to the Dutch life model than the rest of the UK peer group.

Capital Generation Comes First

For me, this is always the starting point. Organic capital generation is the metric that matters most in life insurance. In my experience, this is where investors focus. They focus here rather than on the IFRS earnings line.

Life insurers manage their businesses to the solvency balance sheet, not to IFRS earnings. When management teams put hedges in place, they are protecting solvency capital and managing economic risk. They are not trying to smooth accounting profits. As a result, IFRS earnings can swing materially from year to year. That volatility does not necessarily mean the business is performing better or worse economically.

Organic capital generation tells you how much surplus the business is genuinely creating after new business strain and expenses. It is the renewable resource. It strengthens the solvency ratio and ultimately funds capital return to shareholders.

In FY2025:

• NN delivered 9% growth in organic capital generation
• ASR delivered 10% growth

That is very respectable growth.

Dividend Growth Remains Robust

So how are these insurers using that organic capital generation?

Dividend growth was strong again in FY2025. NN dividend per share increased 13%. ASR increased 9%.

Both stocks already trade on high dividend yields. When yields are elevated, the obvious question investors ask is whether the dividend is sustainable. Is it under threat? Does it get cut? Does growth slow materially?

When a company delivers clear dividend growth, which is driven by strong capital generation, and the starting point is already high solvency, it is hard to argue that dividends are under pressure. Plus, if there is a buyback in place then that’s even more evidence that management are confident in their ability to pay the dividend.

Buybacks: Capital Return In Practice

Dividends are only part of the capital return story.

NN increased its annual share buyback programme to €350m (2.0% of market cap). They stepped it up.

ASR completed €230m of buybacks in 2025 (1.8% of market cap) and announced a further €175m programme (1.3% of market cap) into 2026.

In the UK, Legal & General expects to buyback £1.2bn in 2026 (8% of market cap). Prudential has announced a programme of $1.2bn in 2026 (3.1% of market cap). Aviva has historically operated around £300m (1.5% of market cap), although acquisitions have influenced the timing.

M&G is arguably the most interesting case. It has one of the highest solvency ratios in the UK sector. There is no current buyback programme, but given the capital position, a buyback would be entirely feasible if management chose to prioritise it.

Phoenix is different. Its solvency ratio is lower, around 175%, but that reflects a more heavily hedged balance sheet. Phoenix also has a clear history as a consolidator. It is an obvious bidder for assets such as Aegon UK. Even if that does not materialise, Phoenix’s strategy has consistently been to deploy capital into acquisitions rather than buybacks.

The same can be said of Chesnara, which has just announced the acquisition of Scottish Widows Europe.

Capital return decisions are strategic. But when solvency is comfortably above target and capital generation remains strong, buybacks are economically rational.

Solvency Strength

NN reported a Solvency II ratio of 220%, up 26 percentage points. ASR reported 218%, up 20 percentage points.

I have put together a chart which I think is the central equity question in life insurance right now. How much capital are companies returning, how fast are they growing the dividend, and how strong is the balance sheet?

On the x-axis is dividend per share, DPS, growth, measured as 2026E versus 2025, which gives a sense of momentum. On the y-axis is total shareholder yield, combining dividends and buybacks, which tells you what investors are being paid today. The size of the bubbles reflects excess solvency, the capital buffer sitting behind that return.

At a high level, this chart is telling a reassuring story. Across most of the sector, total shareholder yields are high, dividend growth is solid, and solvency is strong. High yields often make investors nervous because they can imply dividends are under threat. The combination of decent growth and strong balance sheets points in the opposite direction. Cash returns appear better supported than the market price action often implies, which helps underpin confidence in valuations.

A few things stand out immediately.

First, the Dutch names, NN and ASR, sit in the top right quadrant. That combination of solid dividend growth and high total yield is powerful, it signals both momentum and current cash return.

Second, UK insurers offer strong yields, with Legal & General an obvious positive outlier, largely because of the scale of its buyback.

Third, there is a visible inverse relationship across the whole dataset. Higher dividend growth tends to be associated with lower current yield, which is what you would expect in a market that prices for growth versus income.

For me, the interesting angle is solvency. When a company sits on a large excess capital buffer and is already delivering strong dividend growth, the question is no longer whether the dividend is safe. The question becomes whether capital is being used efficiently.

I have set the size of the bubbles relative to a solvency level of 160%. I use 160% deliberately, it is broadly where Solvency II ratios started and it often sits around the midpoint of many target ranges. For example, Phoenix has a bubble of 175% minus 160% equals 15%. NN’s bubble is 220% minus 160% equals 60%, so around four times the size of Phoenix.

My view is that solvency ratios across the sector are too high. I have written about this before and set out the argument in more detail here.

At some point, excess capital becomes a drag on return on capital. A higher solvency ratio mechanically implies lower return on equity, all else equal.

There are sensible ways to bring solvency down towards more efficient levels. Higher dividends. Larger buybacks. Less reinsurance. Different asset allocation within risk appetite.

ASR’s solvency increase was partly supported by the introduction of its internal model. The standard formula is the regulator’s off-the-peg model. It is like loose fitting clothing. An internal model fits more like a glove. It is tailored to the actual risk profile. It is worth saying that this is not a read-across for the UK. UK life insurers already operate approved internal models, so there is limited scope for a comparable model-driven uplift.

When solvency is well north of 200% and capital generation is growing, the conversation should be about capital efficiency, not dividend risk.

Share Price Performance

The share price reaction to the Dutch results was broadly constructive. NN shares rose on the day of results and are up solidly year to date.

Year to date, both NN and ASR have delivered positive returns, reflecting the combination of strong capital generation, high yields and rising solvency.

The same is broadly true in the UK. UK life insurers have generally moved positively year to date (with the exception of Aviva which as noted has a large non-life element), supported by capital return programmes and a stable rate environment.

Operating Profit And IFRS Noise

Operating performance was solid.

• Operating result up 17% at NN
• Operating result up 12% at ASR

Statutory net result fell sharply.

• NN down 25%
• ASR down 43%

That divergence reflects market-driven valuation effects and hedge accounting. It reinforces the earlier point. IFRS earnings are volatile. Capital generation and solvency are more informative.

AI: A Key Focus This Reporting Season

Artificial intelligence will be a major focus for investors this results season.

Investors will ask straightforward questions. How are you using AI? Is it delivering measurable benefits? Is it a competitive advantage or simply table stakes? Is there a threat from new entrants using AI more effectively? If efficiencies are generated, who captures the value?

NN provided useful detail on AI-enabled workflows across underwriting, claims handling and internal operations. AI is embedded in operational strategy rather than being a pilot initiative.

The economic question is whether AI improves return on capital or simply raises the competitive bar for everyone.

What This Means For The UK

The Dutch results are supportive. Operating momentum is healthy. Organic capital generation is growing. Solvency is strengthening. Capital return remains active.

One area I will be watching closely in the UK results is annuity margin.

Just Group recently reported new business annuity margins of around 6% for 2025, down from roughly 8.7% in 2024. That is a material contraction of nearly three percentage points. It reflects increased competition, particularly at the smaller end of the bulk annuity market. A 6% margin is still attractive in absolute terms, but the direction of travel matters.

The key question for UK life insurers is whether margin pressure becomes more widespread. If annuity margins hold up while capital generation continues to grow, the capital return story remains intact. If spreads compress more broadly, that becomes the central debate.

For me, the focus this reporting season is clear. Capital generation, solvency efficiency and annuity margin discipline. IFRS noise is secondary.

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Disclaimer
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.

Audio summary is embedded below.

Over the past week, we have watched the AI scare rotate through financial markets with remarkable speed.

It began with software. Investors started to worry that AI would let companies do the same work with fewer people and fewer software licences, which would mean slower growth and weaker pricing for the big subscription software firms. High valuation software stocks sold off quickly.

Then it moved to insurance brokers. After OpenAI added insurance applications to the ChatGPT App Library, US listed intermediaries fell sharply. The narrative was simple and powerful. If AI can compare quotes, automate placement and reduce friction in commoditised lines, the economics of intermediation must be vulnerable.

The following day, wealth management came under pressure. A new AI-enabled tax planning tool from a US RIA custodian triggered another wave of selling. Major US platforms dropped heavily. In the UK, wealth managers and life insurers with advisory exposure were dragged lower in sympathy. St. James’s Place share price is down 17.5% since close on 10 February 2026.

Software. Brokers. Wealth.

When markets trade in buckets, nuance disappears. Financials become “financials”. Insurance becomes “insurance”. Correlations rise.

The natural question is obvious.

What is next?

If price comparison sites are vulnerable and wealth managers are vulnerable, surely insurers themselves must be next in line.

This is precisely where I would slow down.

If you are looking for a corner of financial services that is structurally insulated from AI-driven disintermediation, capital-heavy UK life insurance is, in my view, a very good place to hide.

I have been analysing life insurers for more than three decades. Disruption stories come and go. What matters is who is willing to hold the risk, and invest the capital behind it, for decades.

Four reasons UK life looks structurally different

1. UK life is a business of long promises backed by substantial capital buffers.

When a UK insurer writes a bulk annuity, it commits substantial regulated capital under Solvency UK. That capital absorbs longevity shocks, credit deterioration, spread volatility and asset underperformance. It sits on the balance sheet for decades.

Tech firms do not want to do that. Their model is asset-light and scalable. The life insurance model is capital-heavy and long duration. Only insurers want to warehouse that type of risk.

2. The duration and the tail matter.

The economics of annuities are driven by risks that sit 20, 30 or 40 years into the future. Longevity improvements, medical advances, extreme credit cycles and regulatory recalibration all play out slowly and often asymmetrically.

You can refine assumptions with better data. You cannot eliminate the fact that someone must absorb the tail if outcomes differ materially from expectations. That requires capital, not code.

3. In life insurance, regulation is the rulebook that keeps the game closed.

There is a well-known technology mantra about moving fast and breaking things. You simply cannot do that inside a regulated life insurer. Matching Adjustment rules are technical and tightly policed. Insurers have to prove, in detail, that their assets and liabilities match, and regulators challenge the assumptions, stress tests and governance on an ongoing basis.

Insurance companies are slow-moving by design. That can frustrate investors in periods of technological exuberance. In moments like this, it becomes a defensive strength.

4. The return profile is good, but it is not venture-style attractive.

UK annuity writers can earn low double-digit ROE and, in favourable markets, mid-teens IRRs on new business. Those are respectable returns in a regulated capital-intensive sector. They are not the sort of scalable, high incremental returns that typically attract technology platforms.

AI firms want to sell tools. They do not want 40-year liabilities.

Where AI genuinely helps

None of this means AI is irrelevant. Quite the opposite.

Where I see genuine impact is in operating efficiency, and in a spread-based business that compounds over time.

When I was a pensions actuary at Lane Clark & Peacock in the 1990s, we would often spend six to nine months cleaning data before we even began valuing the liabilities of a defined benefit pension scheme. Records were scanned, fields were inconsistent, dates of birth were missing, data sets didn’t reconcile.

The first phase of any project was forensic reconstruction.

That friction in cleaning data has not disappeared entirely.

If AI can extract and structure decades of unstructured pension data in minutes rather than months, that meaningfully shortens the timeline for bulk annuity transactions. It reduces execution risk, lowers cost and increases capacity in a market that is often constrained by operational bandwidth.

For years, people in the market have said the real bottleneck in getting bulk annuity deals done was not capital or appetite, it was people. There were only so many individuals with the technical knowledge and experience, whether sitting inside insurers, consultants or the pension schemes themselves. If AI takes a chunk of the manual work off those desks, it does not change the economics of the promise, but it can materially increase the throughput of the system.

It is not glamorous disruption. It is economically meaningful plumbing.

The same logic applies to underwriting triage and to monitoring private credit portfolios inside Matching Adjustment books. Faster analysis and better surveillance reduce operational strain and, potentially, capital volatility.

Those gains strengthen incumbents rather than displacing them.

The uncomfortable truth about efficiency

There is, however, an important qualification.

If all insurers become more efficient at the same time, the benefit may not accrue entirely to shareholders.

Bulk annuities are intensely price competitive. Consultants run structured processes. Insurers compete aggressively on spread vs gilts.

If AI reduces cost across the industry, pricing may simply tighten further. Efficiency gains could be competed away and captured by pension schemes rather than by equity holders.

That dynamic is not new. It has always been present in spread businesses. Lower cost does not automatically translate into structurally higher margin.

Where I see the genuine risk

If there is structural pressure from AI, I believe it is more likely to sit in distribution than in manufacturing.

Bulk annuities are largely price-driven. Consultants play a central role in shaping competitive processes. Insurers are often treated as comparable risk manufacturers, differentiated primarily by pricing and execution certainty.

If AI enhances consultants’ ability to compare pricing or reduces their own cost base, the pressure on spreads may intensify.

I have seen the power of distribution before.

When I was at Standard Life, we identified a significant cohort of customers who preferred to buy directly rather than through IFAs, particularly younger clients. We were keen to lean into that opportunity.

The response from parts of the IFA community was instructive. Push too hard towards direct distribution and business could quietly migrate elsewhere.

Distribution channels have leverage.

Consultants in the bulk annuity market are not identical to retail IFAs, but they are influential. If AI strengthens their hand, insurers may feel it in pricing.

That, in my view, is the more plausible medium-term pressure point.

A realistic caveat

Life insurers are not naturally fast adopters of new technology. They administer policies written decades ago. Core systems can be old even if the interface appears modern. Execution risk is real.

If incumbents fail to embed AI effectively, productivity gains may accrue elsewhere in the ecosystem. That is something I would watch carefully.

So will AI crack the lid?

In my view, no.

AI rewires the plumbing. It sharpens underwriting, it improves monitoring, it lowers friction, but it does not remove the need for capital. It does not eliminate 40-year liabilities. It does not absorb longevity tail risk.

In Bulk Annuities/Pension Risk Transfer, capital remains the central language. Regulators speak it fluently. No AI model, however sophisticated, can write a cheque for a longevity shock without a balance sheet behind it.

The Insurance Black Box is not being smashed open, it is being reinforced from the inside.

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Disclaimer
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.

Audio summary is embedded below.

Last week I published Part 1 of this series, setting out why UK life insurers hold private credit in the first place and why, in my view, much of the current anxiety imports a US narrative that does not fit the UK framework.

The central point was simple. Annuity liabilities are long term, cannot be traded or redeemed, and are therefore naturally matched with long dated illiquid assets. A further appeal of private credit is that it can be bespoke, structured around the cash flow profile an insurer needs, and it is often available in longer durations than public credit markets can reliably provide at scale. I also set out why the credibility of credit assessment in the UK rests heavily on regulatory scrutiny. This note should be read alongside that first piece.

Here, I move from narrative to numbers, pulling together company disclosures from the 2025 half year analyst presentations, alongside the PRA’s Life Insurance Stress Test published in November 2025, to show what sits inside annuity portfolios and what the key risk calibrations actually look like.

Asset mix and rating quality

The credit quality picture is particularly clear in the annuity asset rating mix disclosed in the H1 2025 analyst and investor presentations. As the chart shows, almost all annuity assets are investment grade, in practice around 99%, with the bulk sitting in the AA and A buckets and only a very small tail below that.

In my view, this is an important anchor for the private credit debate, because investment grade credit simply does not default in meaningful volume, even in very stressed environments. The risk in a downturn is far more likely to show up through spread widening and downgrades rather than large realised default losses on assets that start life as investment grade.

A quick note on the chart. The numbers in it show the proportion of assets by credit rating bucket (AAA, AA, A, BBB, etc.). In most cases the split relates to the entire portfolio, including M&G, Just Group, Phoenix and Legal & General, but there are exceptions, notably PIC, where the disclosure covers the corporate bond and private debt securities portfolio, and Aviva, where it relates to the corporate bond portfolio only, so the chart is not strictly like for like across firms.

Internal ratings and regulatory oversight

A recurring concern in commentary is whether internal credit assessments can be trusted. I covered this in more detail in Part 1, but the short version is that internal ratings in UK life insurers sit within a supervisory framework where the PRA has visibility into methodology and governance, and has the power to challenge assumptions and outcomes. That regulatory scrutiny is, in my view, the key differentiator versus the US narrative.

From my time at Standard Life, I have a healthy respect for how directly and intensively the regulator engages on these issues. I do not repeat that discussion here, but it reinforces why I place weight on the UK supervisory framework when assessing the credibility of internal ratings.

What private credit actually looks like inside UK annuity books

The next chart uses the PRA stress test asset split for matching adjustment portfolios as the common baseline, because it is one of the few sources that puts multiple annuity writers on a broadly consistent footing. The PRA presented results at legal entity level, but I have replaced those entity names with the better-known group names to make the comparison more intuitive.

I have also ordered insurers by the combined weight of corporate bonds plus sovereigns, moving from the lowest share on the left to the highest on the right. At one end, Aviva is shown with 24% sovereigns and 22% corporate bonds, a combined 46%, while at the other end PIC is shown with 41% sovereigns and 38% corporate bonds, a combined 79%.

The key point is not that one structure is better than another, but that annuity portfolios are deliberately constructed in different ways within the same regulatory framework. Sovereigns and public corporate bonds form a meaningful anchor across the sector, complemented by secured residential lending, equity release mortgages, infrastructure and other secured lending. I set out what each of these involved in the first note.

I have used the PRA stress test disclosure because in their own company reports asset type disclosure across UK life insurers is not fully standardised, and firms use slightly different classifications and levels of granularity. That makes perfectly like for like comparison difficult. In my view, greater standardisation of disclosure across the sector would help build further confidence in this asset class.

What recent experience tells us about defaults

Looking at recent history, it is striking how little evidence there is of material default losses within UK annuity portfolios. Across years of deep disclosure and analyst scrutiny, I cannot recall a single instance where private credit defaults had a material impact on the earnings or capital position of a major UK annuity writer.

That does not mean assets never deteriorate. In practice, insurers actively manage credit risk. When assets are downgraded and capital charges rise, it often becomes capital inefficient to continue holding them. At that point, insurers will typically sell the exposure, even at a loss, and reinvest the proceeds into assets with the same cash flow signature, meaning assets that still match the timing and predictability of the annuity liabilities, but which are more capital efficient and better support return on capital. The worst-case outcome is therefore not silent default, but an orderly reallocation away from assets whose risk profile has changed.

During the pandemic, annuity portfolios behaved as they were designed to. For example, Legal & General disclosed that 99.9% of scheduled cashflows on its annuity portfolio’s direct investments were paid during 2020, and that its IFRS Credit Default Reserve remained unutilised, which is a useful reminder that even a severe real world shock tends to show up more through spread volatility and downgrades than through realised defaults in investment grade annuity books.

The Credit Suisse episode in 2023 is a different, but equally instructive, case study. The instruments that were wiped out were Credit Suisse AT1s, which were written down to zero as part of the UBS rescue. When the news broke there was a fear that UK annuity writers might have significant exposure, but public disclosures and subsequent commentary indicate they did not hold positions in these instruments.

Following successive downgrades, Credit Suisse bonds became increasingly capital‑inefficient, particularly for matching adjustment portfolios, and would have been run down or sold well before any default or write‑down event. This is why shocks like Credit Suisse have not shown up as material solvency events in UK annuity reporting.

What the PRA stress test tells us

In this section I focus on the Stage 2 calibration of the PRA’s Life Insurance Stress Test, summarised below. This is what the PRA calls the developing market shock, and it is the most severe part of the scenario. It is the point in the test where defaults and downgrades are introduced, which the initial Stage 1 market shock does not include, alongside sharp spread widening and property price falls.

I have taken each insurer’s Stage 2 decline in solvency ratio, as set out in the insurer-specific results published by the PRA, and expressed it on a comparable basis by dividing that decline by the insurer’s solvency ratio immediately before the Stage 2 shock, meaning its Stage 1 solvency ratio.

The table below sets out the estimated solvency impacts from that stress. The range is from 10% at M&G to 22% at Rothesay. That pattern is unsurprising, because the largest impacts appear at those with the proportionately largest annuity books, where the balance sheet is more concentrated in matching adjustment assets by design.

The more important point, in my view, is that the magnitudes are very manageable. These are firms that start from very high solvency ratios. Even a 10% to 22% hit leaves substantial headroom given balance sheets are at all time highs. It is difficult to reconcile these numbers with the idea that private credit represents a latent threat to solvency or dividend capacity.

A note on Rothesay: although it shows the largest percentage reduction under the stress, it started from the highest year-end 2024 solvency ratio at 264%, the strongest in the peer group, so the move needs to be seen in the context of that higher starting point rather than in isolation.

Drawing the threads together

Taken together, and building on the arguments set out in last week’s note, the data in this piece reinforces a straightforward conclusion. We have looked at the disclosed credit rating mix and seen that almost all, in practice around 99%, of annuity assets across the major UK writers are investment grade. We have examined the PRA’s stress test results and seen that even under a severe scenario combining downgrades, defaults and property price falls, the impact on solvency ratios remains manageable, including for the pure annuity specialists.

In my view, when you move from narrative to numbers, the private credit story in the UK looks far less alarming than some of the imported commentary suggests. Much of the anxiety reflects complexity and inconsistent disclosure rather than evidence of mis-risked balance sheets. The debate has increasingly been framed through a US lens, shaped by a different ownership structure and regulatory model. That narrative does not map neatly onto the UK system.

Private credit sits deep inside the insurance black box, and its technical nature makes it difficult for non-specialists to interrogate. That makes it easier to speculate about risk than to quantify it. Insurers themselves have not always helped by failing to standardise disclosure or present the asset class in a consistent, accessible way. Until that improves, private credit will continue to attract suspicion. Based on the evidence available today, I do not think that suspicion is justified.

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Disclaimer
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.

In this episode, two presenters discuss and debate the themes from my August 2025 note on the Just Group takeover and the wider question of why public markets struggle to value long dated, predictable insurance cashflows.

Using UK bulk annuities and the Just Group transaction as a case study, they explore the mismatch between short public market time horizons and the multi decade economics of annuity writing, including upfront capital strain, payback periods, and long-term surplus generation. The discussion also considers why private capital appears more comfortable underwriting these risks than listed equity investors.

They also debate whether time horizons are the full explanation, why valuation discounts can persist despite strong solvency and cash generation, and what Brookfield’s acquisition might signal for the wider UK life insurance sector.

This audio is an AI-generated discussion based on the original written note, reflecting the arguments and perspective set out at the time.

Disclaimer
This audio discussion is for general information only and reflects my views at the time the original note was written. It does not constitute investment advice, a recommendation, or an offer to buy or sell any security. The discussion is based on publicly available information and is not intended to be relied upon as a basis for investment decisions. Listeners should form their own views and, where appropriate, seek independent professional advice.

In this episode, I walk through why UK life insurers invest in private credit and why, in my view, the market often overstates the associated risks.

The discussion follows the structure and arguments of the written note, focusing on annuity liabilities, asset duration, regulatory oversight and why US private credit concerns do not translate cleanly to the UK.

A brief disclaimer is set out below.

Disclaimer
This audio reflects my personal views and is provided for general information purposes only. It does not constitute investment advice, investment research, or a recommendation to buy or sell any security. Any views expressed are based on information believed to be reliable at the time of recording and may change without notice. Listeners should make their own independent assessments.

Audio summary is embedded below.

A major reason UK life insurers continue to trade on dividend yields of 6 to 9% is, in my view, that asset risk remains the single biggest concern for investors. When I have surveyed institutional investors, credit and investment risk have consistently dominated their thinking, far more than longevity, mortality or operational issues.

Why the Noise Is Rising Around Private Credit

That concern has also been reinforced by the regulatory narrative. In the Prudential Regulation Authority’s (PRA) Insurance Supervision 2026 priorities, published on 15 January 2026, the regulator stated:

“It is also important that firms’ credit risk management practices align with evolving investment strategies, where we continue to see firms moving into newer asset classes and geographies. We will continue to focus in our supervisory work on the adequacy of firms’ credit assessment frameworks, including the robustness of internal ratings where relevant. Firms should pay particular attention to exposures to private credit assets, given the risks identified by the Financial Policy Committee about the potential interlinkages and vulnerabilities of exposures to private markets in stressed conditions.”

In the Bank of England’s Financial Stability Report, December 2025, published on 2 December 2025, it highlighted vulnerabilities in private markets, including opacity and valuation uncertainty, as insurers’ allocations have grown.

Over the past year, that anxiety has been amplified by comments from senior policymakers and bank chief executives. Jamie Dimon, CEO of JPMorgan, referred publicly to losses on a private credit exposure and used a phrase that stuck in the market’s imagination, suggesting that “when you see one cockroach, there are probably more”. The chief executive of UBS has encouraged investors to slow the pace of private credit deployment and to pay closer attention to underwriting standards.

The Bank for International Settlements has also published several pieces highlighting the challenges of monitoring risk and valuation in fast-growing private markets, particularly where insurers are significant holders.

The Financial Times has highlighted a growing concern in the US market about how private credit held by insurers is being rated, arguing that regulatory capital rules create strong incentives for assets to be classified as investment grade. It notes that while the number of securities rated by Moody’s, S&P and Fitch has been broadly flat, the volume of privately rated securities has risen sharply, with much of that growth coming from smaller specialist agencies.

The FT references analysis by the US National Association of Insurance Commissioners (NAIC) suggesting that so-called private letter ratings have often been more generous than the NAIC’s own internal assessments, with securities frequently upgraded when insurers move from an NAIC designation to a purchased private rating, raising the risk that some credit is being misclassified and that insurer capital could prove insufficient in a stress.

None of this language is unreasonable in a global context, but it has contributed to a growing sense that private credit represents a hidden problem for balance sheets of UK life insurers.

I will come back to the company data and the regulatory stress tests in a follow-up note. This piece focuses on why insurers are in private credit in the first place and why I think much of the current concern is misplaced in the UK context.

Why insurers invest in private credit at all

The starting point is the nature of annuity liabilities. These liabilities arise both when an individual buys an annuity at retirement and when a defined benefit pension scheme transfers its liabilities to an insurer through a bulk annuity, which is the insurance contract used in a pension risk transfer transaction.

In either case, the economics are similar. Once the annuity is written, the liability cannot be exited or traded, and the insurer is committed to paying a long stream of cash flows, either to an individual policyholder or to a closed pool of pension members, for as long as those members live.

Because annuities are typically written from around age 60, that commitment can easily extend for 30 to 40 years. There is no secondary market for these liabilities, and there is no option for the policyholder or pension scheme to cash out, which means the insurer does not face day-to-day liquidity demands in the way a bank or an open-ended fund does.

To back liabilities of that nature, insurers need assets that are genuinely long-term and predictable. That requirement, rather than any appetite for complexity, is what drives the use of private credit. It is also why the distinction between public debt and private debt matters.

Public debt is issued into public markets and traded. Government bonds, listed corporate bonds and publicly issued securitisations fall into this category. These instruments offer transparency and liquidity, but they are limited in maturity. Most public corporate bonds are issued for five to fifteen years, and there is relatively little supply beyond twenty years. Even in government bond markets, the availability of ultra-long maturities is constrained relative to the scale of annuity liabilities being written and transferred from defined benefit pension schemes.

Private debt, by contrast, is arranged directly between borrower and lender and is not designed to trade. Because of that, it can be structured with genuinely long maturities, amortising repayment profiles and cash flows that align closely with long-term liabilities. Borrowers such as infrastructure operators, housing associations and utilities often want financing that runs for decades, because their assets and revenues do the same. Life insurers who write annuities are natural providers of that capital.

Private credit typically offers an illiquidity premium, meaning an additional return for committing capital to assets that cannot be easily sold. For a life insurer, that is a particularly attractive feature because its annuity liabilities are themselves long-term and illiquid, with no secondary market and no day-to-day liquidity demands. That creates a natural match, namely illiquid assets backing illiquid liabilities, and the illiquidity premium is additional return the insurer earns for being willing and able to hold those assets for the long term.

There are very few other large financial institutions in the same position. Banks, for example, fund themselves largely with deposits and other short-term liabilities that can leave quickly, which makes them structurally less suited to hold large volumes of long-dated illiquid credit on balance sheet.

What private credit actually means inside UK life insurers

Before going any further, it is worth being clear about what private credit actually means inside UK life insurers, because it is often discussed as if it were a single, homogenous asset class. In reality, it covers a range of long-term, secured assets that are held to match annuity liabilities rather than to maximise short-term returns.

In UK annuity portfolios, private credit typically includes:

• Infrastructure debt, such as long-term lending to regulated utilities, transport assets or renewable energy projects, where cash flows are contractual and often inflation-linked.

• Long-income real estate debt, backed by properties let on very long leases to high-quality tenants, with rental income used to service the debt over decades.

• Social housing loans, which finance housing associations and are supported by regulated rental streams and government-linked policy frameworks.

• Investment-grade corporate private placements, where insurers lend directly to large companies outside the public bond market, typically on a secured or covenant-heavy basis.

• Equity release mortgages, which provide lifetime loans to older homeowners and form a significant part of the illiquid asset mix for several annuity writers.

The common feature across these assets is not complexity for its own sake, but duration and predictability. They are structured to produce long-term cash flows that align closely with annuity payments, and they are intended to be held for many years rather than traded.

In my view, this distinction matters, because it means the private credit held by UK life insurers looks very different from the sponsor-backed lending and leveraged structures that dominate much of the global private credit debate.

The global private credit narrative

Most of the concern around private credit is focused on developments in the United States. There, sponsor-backed mid-market lending has grown rapidly over the past decade, often with weaker covenants, greater leverage and limited transparency. A significant volume of lending now takes place outside the banking system, and much of it has yet to be tested through a prolonged and severe credit downturn.

A recurring theme in that debate is the credibility of credit ratings. It is important to be clear about what is, and is not, being questioned. The major global rating agencies, Standard & Poor’s, Moody’s and Fitch, are doing the job they have always done. The concern has arisen around the growing use of smaller or specialist rating providers, and in some cases private assessments, where ratings have appeared generous relative to subsequent market signals or realised performance. That distinction matters, because it is the use of more permissive rating frameworks, rather than public ratings themselves, that has driven much of the scepticism around private credit in the US.

Why the US trend does not apply to the UK, in my view

One reason private credit concerns are often misapplied to UK life insurers is that regulatory frameworks differ far more than is commonly assumed. In the United States, insurance regulation is overseen at state level and coordinated through the National Association of Insurance Commissioners. Under that system, insurers can rely on ratings from a wide range of agencies, and regulatory capital requirements often follow those ratings directly. That creates incentives for issuers and investors to seek out more favourable assessments, particularly for complex or illiquid assets.

The UK framework is very different. UK life insurers are supervised by the Prudential Regulation Authority, which recognises only a limited number of External Credit Assessment Institutions for regulatory purposes. More importantly, for annuity portfolios, external ratings are often only an input. Insurers are required to produce internal credit assessments for many assets, particularly bespoke or illiquid ones, and those assessments must be mapped to recognised rating scales and justified to the regulator.

In both regimes external ratings matter, but internal assessments and supervisory challenge are more central in UK matching adjustment portfolios. I understand that the NAIC is seeking to strengthen its framework.

Internal ratings and regulatory scrutiny

In my view, the credibility of internal ratings in UK life insurers rests squarely on the role of the Prudential Regulation Authority. Internal credit assessments are not simply internal modelling choices. They sit within a supervisory framework where the regulator has visibility into methodologies, governance and outcomes, and where it has the power to challenge assumptions and require changes.

I also have a very practical reason for taking that oversight seriously. In my time as Investor Relations Director at Standard Life, I saw first hand the power and influence of the regulator on the business. The regulator could, and would, set up in an insurer’s office for lengthy periods, going deep into processes, data and decisions. Senior management would do everything in their power to assist, and no one would dare try to pull the wool over the regulator’s eyes, because the consequences of getting on the wrong side of the PRA are real and immediate.

There is concrete evidence that this scrutiny is real. The PRA has stated publicly that it has challenged insurers on credit risk assumptions, internal ratings and asset eligibility within matching adjustment portfolios, with those challenges leading to assets being excluded, higher capital being required or matching adjustment benefits being reduced. In my view, that regulatory oversight is a critical safeguard, and it materially changes the risk profile of private credit inside UK life insurers relative to less constrained parts of the global market.

That still leaves the question of evidence. What has actually happened, and what do stress tests and company disclosures tell us about how private credit behaves under pressure. That is what I will turn to in my next post on private credit.

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Disclaimer
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.

The recent headlines about Greenland were always political, but they were also strikingly transactional. President Donald Trump publicly floated the idea of the US buying Greenland, then the news agenda moved on quickly and attention shifted to his new Board of Peace initiative.

I am not going to comment on the politics. I do want to borrow one simple idea from the noise because it is relevant to business, boards, and investing. I will bring this to life using two very current examples in the sector, Brookfield’s agreed offer for Just Group and Zurich’s approach to Beazley.

Everything has a price.

That phrase can sound cynical. I do not mean it that way. I mean it in a practical sense. A listed company is a stream of future cash flows, and the stock market puts a price on that stream every day. When someone wants to buy the whole company, the question becomes even more direct, what is the price at which shareholders should say yes.

I have spent most of my career looking at insurance and pensions from several angles. I started as an actuary advising these businesses. I have also been a fund manager. I have worked inside a large insurer, and I have covered the sector as an equity research analyst. That mix has left me sceptical when a management team reaches for slogans about independence, because I have seen good boards do the valuation work and bad boards hide behind “never”.

The board’s uncomfortable homework

A well run company should know two things at all times.

First, what the business is worth on a standalone basis, not as a single number, but as a sensible range.

Second, what I would call the walk away price, the level at which selling becomes the right outcome for shareholders, not just because it looks attractive on paper, but because it is a realistic way to deliver value within a sensible timeframe, rather than hoping the market eventually rerates the shares to where the board thinks they should be.

In my career, whenever I heard a CEO say they would never sell, or that there is no price at which they would sell, that worried me. Sometimes it is principled. Often it is something else.

• It can be identity, as in, this company is “my life’s work”.

• It can be incentives, as in, this deal ends my job.

• It can be avoidance, as in, we have not done the valuation work properly, so we fall back on slogans.

In regulated sectors like insurance, selling a business is never only about shareholders and the headline price. Regulators, customers, and in insurance, policyholders, all matter. The point is that caring about those things does not replace valuation. It sits alongside it.

A board that refuses to think about price, or that repeats that it will never sell, is not being noble. It is being unprepared.

What we did at Standard Life

When I joined Standard Life in 2006, it was just before it moved from being owned by its members to being a listed company, so a big part of the job was helping the business get used to thinking like a PLC.

I am certainly not claiming sole credit for it. Lots of people contributed, but I would like to think I helped us to think more like a PLC in the way we framed shareholder outcomes and strategic options.

That mindset showed up in how we thought about takeovers. Even before the float, we had already seen takeover interest. We decided to disclose in the demutualisation proposal document that there had been an approach for an all share merger, as well as other parties sounding us out about taking significant stakes once we listed, but we did not disclose who the approach had come from. It was an acquisitive time in UK life, Aviva had only just tried an all share deal for Prudential, and Resolution was buying closed life books, so it was not theoretical.

One boardroom exercise I remember vividly was simple. We were on the seventh floor of Standard Life House in Edinburgh, with huge wraparound windows and a view across the city, Edinburgh Castle sitting out there in the distance. We also had some of our house brokers in the room with us. Each of us wrote down, privately, what we thought the right price would be for the group. Nobody shared their number. We did not vote on it. We did not do anything operational with those numbers. It was not tied to a live approach.

It was a discipline exercise. It also reinforced something I came to appreciate over and over again, moving from mutual to PLC is not an overnight change. Even when I left four years later, I would say the culture of the group was still very much that of a mutual, and the vast majority of staff still instinctively thought like a mutual rather than like a listed PLC.

You can see echoes of that across the UK life sector even now. There were many demutualisations around 25 years ago, but in some groups the culture still carries a mutual mentality, especially among long serving staff who were there when the organisation was member owned. That often shows up in how people talk about independence, stakeholders, and permanence. That is not necessarily wrong, but it can become a problem if it turns into an instinctive refusal to engage with the valuation question. In public markets, avoiding that question does not make it go away.

Price is not only value, it is also time and probability

Here is a point that is often underestimated in takeover situations.

There is a difference between what a business might be worth on a standalone basis, and what shareholders can realistically expect the market to pay for it within a sensible timeframe.

That gap matters because time is not free. While you wait for the market to “catch up”, shareholders carry the risk. The share price can drift, sentiment can turn, management changes, regulation changes, and the company can be one bad year away from a rerating in the wrong direction.

So when an offer arrives, the decision is rarely just, is this above my view of intrinsic value. The decision is more like.

Is this certain value today better than the most realistic path for the share price over the next few years, once you allow for uncertainty, time, and downside risk.

That is why a takeover premium can be rational even when it does not match the most optimistic internal valuation.

Just Group and the “unreachable rerate” problem

Just Group is a good recent example in my view, and the transaction is still progressing through the final steps to completion.

Brookfield Wealth Solutions agreed to buy Just at 220p per share. Shareholders have already voted strongly in favour of the deal.

Even if you believed Just was worth more than 220p, and I certainly thought you could make that case, you still have to face a public market reality. The chart below highlights that the market had not been willing to price Just anywhere near 220p for any sustained period. So the board’s question is not only, what is intrinsic value. It is also, what is the most realistic path for the share price within a sensible timeframe, and what risks do shareholders carry while they wait.

Brookfield is also a good example of what I mean by a sophisticated buyer. This is patient, technically confident capital that can look at a business the market is undervaluing and say, we are happy to own this privately and wait.

Beazley, when the bidder goes public and the CEO keeps the door open

Beazley is a different sort of case, but it lands on the same tension I described at the start, what a business is worth, versus what shareholders might accept in the real world.

Zurich is offering cash, and Beazley’s board has already turned the latest proposal down. Beazley has said that Zurich offered £13.15 per share last June, which makes the latest reported £12.80 per share cash proposal lower than what has been on the table before. Zurich has said this is its fifth proposal, and it is the one it has chosen to take public, whereas the earlier discussions were private.

In my view, Beazley’s CEO has handled this well. He has been clear that the price is not there yet, while also leaving the door open. He has acknowledged that, at the right price, the two companies together could be a powerful engine. That is exactly how a CEO should approach this. He is running the business for shareholders, not for management.

The public step by Zurich also tells you something about the tactic. Zurich seems to be saying, this price might not match Beazley’s view of absolute value, but it might be high enough for shareholders to take, especially if it is framed against where the shares have traded. In other words, Zurich is trying to close the gap between intrinsic value and an acceptable clearing price by moving the debate from private conversations to the shareholder register.

Why these situations matter in this sector

Insurance and pensions businesses can be excellent cash generators, but they are not always easy for generalist investors to analyse. Balance sheets are complex. The economics are not always intuitive. The story is harder to tell than a simple consumer brand or a straightforward industrial business.

That complexity can leave share prices below what long term fundamentals might justify for long periods.

When that happens, sophisticated buyers sometimes step in and pay what the public market will not. Brookfield’s agreed purchase of Just is a good example of this. It is exactly the kind of patient capital that can look at a misunderstood business and say, we are happy to own this privately and let value compound away from the daily voting machine of the market.

So takeover activity can be a sign of something simple. The business is creating value, but the stock market is not giving full credit for it, and someone with patient capital is willing to crystallise that gap.

In my view, we will keep seeing professional investors and patient capital, including global asset managers and private equity, showing interest in the life sector because the long running transfer of assets and liabilities from DB pension schemes to insurers, via bulk annuities, should translate into steady net inflows for decades.

What I would like every board to do, before the phone rings

A good board does not need to want a takeover. It just needs to be ready for one.

These are the basics I would expect:

• A regularly updated valuation range, with clear assumptions.

• A clear definition of what would make an offer acceptable or unacceptable.

• A pre-agreed process for handling an approach, including independent advice.

• A stress test of the refusal case, what happens if you say no and the market rerates you down.

• A hard look at incentives, because deals expose misalignment quickly.

• A clear understanding of who the likely buyers are and what they value.

None of this commits you to selling. It commits you to competence.

Closing thought

Boards are not the owners of listed companies, shareholders are. The board’s job is to run the business for the owners, not for themselves.

A simple analogy is a trustee looking after someone else’s estate. A trustee can improve it, protect it, and decide how it is run, but they do not get to treat it as personal property. If a good offer arrives, their role is to evaluate it fairly, explain the trade offs clearly, and let the owners decide.

That is the lens I come back to.

Everything has a price, and the companies that pretend otherwise usually find that the market sets one for them anyway, just not on terms they chose.

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Disclaimer
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.

1. Why look back now

The first half of January is a sensible moment to look back at performance, provided it helps me draw lessons from 2025 that improve decision making in 2026, rather than simply celebrate a strong chart.

UK life insurers are an interesting case study because the last few years capture something markets do repeatedly. Fundamentals can improve for a long time without share prices responding, especially when investors are uneasy about risks. Then, when one or two catalysts arrive, the market can re-price very quickly, and the move feels obvious in hindsight.

2. Sector performance, and how it compares with the wider market

This chart puts the UK life rally into context. Over the last year, FTSE 350 Life insurance sector delivered a +55% price return, materially ahead of the FTSE 100 and global equities, and well ahead of non-life insurers.

This longer-term chart puts the 2025 move into context. The sharp re-rating in 2025 came after a prolonged period of weak price performance. The sector de-rated through 2022, then ground sideways to down through 2023 and 2024 as worries about asset risk dominated investor thinking.

Even after the 2025 rally, the FTSE 350 Life Insurance index is only just back to around its early 2021 level. That is why 2025 is a catch up from a depressed starting point, rather than the result of steady compounding over several years.

If I go back further, to the start of the Solvency II regime in 2016, the long-term share price story is still disappointing. Solvency II brought more prudence into UK and European life insurers’ balance sheets, and in principle more safety for investors, because companies were required to hold bigger capital buffers against the risks they run.

Despite that stronger regulatory foundation, the UK life sector has materially underperformed the broader equity market, and it has also materially underperformed banks.

A quick note on these performance charts. They show share price performance only, and I have not included dividends. That matters because UK life insurers are a high yielding sector, so total returns would look better than price returns, and the underperformance versus the broader market would be less severe than these lines suggest. Even so, the direction of travel is the same, life has still underperformed over long periods, and that is the context for why the 2025 re-rating matters.

3. Why I think the life sector performed so well in 2025

I think 2025 is best described as a re-rating year, driven by a small number of catalysts that changed how investors framed the sector.

Private equity interest, the most important catalyst

The biggest single narrative catalyst in 2025 was private capital and global asset manager interest in the UK retirement savings and bulk annuity ecosystem. The clearest example was Brookfield Wealth Solutions announcing a recommended cash offer for Just Group. See my post on why private capital is interested here.

This was not an isolated data point. In July 2025, Athora agreed to acquire Pension Insurance Corporation Group (PIC) for £5.7bn, bringing another large, institutionally backed player into the UK bulk annuity market. Legal & General also announced a strategic partnership with Blackstone, aimed at expanding access to investment grade private credit origination to support annuities growth, which is another example of asset managers leaning into the asset side of the model.

What I take from these developments is that the marginal buyer is increasingly a global asset manager style investor, and the logic is intuitive. Bulk annuities look like a long duration, steady stream of net inflows, which is exactly what an asset manager wants, and it can run for decades. The second prize is the ability to do more on the asset side, origination and structuring, which can improve economics and create additional fee like revenue streams.

What this means for 2026: I am not saying every insurer is “in play”. I am saying the sector has gained a more durable valuation reference point. If the market continues to see bulk annuities as long dated inflows with meaningful asset side optionality, it becomes easier to justify a lower risk premium, and therefore a higher valuation floor.

Starting valuations were extreme, and they are still supportive

The starting point for the 2025 re-rating was an unusually sceptical valuation. At the start of last year, the entire UK life sector, with the exception of Just Group, was yielding 8% at the low end, Aviva, to 11% at the high end, Phoenix and M&G, levels that historically imply dividends are at severe risk of being cut.

The chart below shows where yields sit now, after the re-rating. Even today, UK life insurers yield around 6% to 8%, which is higher than the major UK banks and more than double the FTSE 100 average. In other words, the market has moved, but it is still pricing the sector at a meaningful risk premium.

In several cases, even basic analysis suggested that the dividend risk embedded in early 2025 valuations was overstated, with strong balance sheets, good cash generation, and visible bulk annuity growth underpinning distributions.

What this means for 2026: a repeat of 2025’s magnitude is not my base case, but yields remain supportive versus the wider market, and versus banks, if delivery continues and asset risk surprises are avoided.

The PRA stress test helped narrow the tail risk debate

Another factor that, in my view, helped the sector in 2025 was the PRA’s Life Insurance Stress Test 2025 published in November. The results reinforced a simple point, namely that the sector looks resilient even under a severe but plausible financial market shock. See my stress test post here.

These publications rarely move share prices on the day, and that was the case here, the immediate reaction was subdued. The more important dynamic is slower. It takes time for investors to absorb what the results imply for the sector’s risk premium, particularly for those still anchored to older concerns around asset risk and balance sheet fragility. In this case, share prices were stronger in the weeks that followed, which I think reflects investors gradually taking comfort from the message on resilience.

What this means for 2026: I think this evidence should make it harder for the market to re-price the sector back to “crisis valuations” without a genuine trigger. That said, I would still expect the sector to underperform in broad risk-off phases, because it trades as part of financials and risk assets.

Capital strength became surplus capital, and management teams now need to be willing to use it

The chart below captures one of the oddities of the last decade. Solvency ratios have risen materially, particularly post the pandemic, yet higher solvency has not consistently translated into higher share prices. The sector spent long periods de-rating, or going sideways, even as reported capital strength moved higher.

A notable feature of this cycle is that basic solvency ratios have pushed up towards all-time highs, and that move has largely been demanded by investors, rather than pushed up by regulators. Many management teams are now operating above the top end of their stated capital ranges.

The next step is not to celebrate ever higher ratios, it is to decide what to do with the surplus. The reason is simple. Higher capital ratios mean a lower return on capital, because the same cash generation is being spread across more equity capital. In other words, the goal is not maximum solvency, it is an optimal amount of capital, enough to be resilient and credible, but not so much that it drags on shareholder returns.

My view is that management teams need to be brave enough to let solvency ratios come down, in a controlled way, as confidence in balance sheet resilience increases. Two practical mechanisms stand out. First, buyback programmes are a direct and transparent way to reduce surplus capital while improving per share metrics, and they are already a live feature of the sector, Aviva, Legal & General, Prudential, and St James’s Place have all been running buybacks recently as part of their capital return toolkit. Second, writing bulk annuity business while relying less on reinsurance can absorb capital more organically, albeit with a different risk and return profile. See my deep dive on capital here.

What this means for 2026: I think investors should increasingly judge management teams on capital allocation discipline and credibility, not on how high the solvency ratio can be pushed. Companies that can demonstrate a clear route from surplus capital to shareholder returns or value accretive growth should continue to command a lower risk premium.

Buybacks did two jobs, they returned cash and they signalled undervaluation

I do not see buybacks as just maths. They are also messaging. A management team buying in size is effectively stating that it thinks the shares are cheap, and that it has confidence in future capital generation.

What this means for 2026: sustained buybacks can support valuation and total return, even if the sector does not enjoy another large re-rating.

Bulk annuity demand stayed strong, helped by more DB schemes in surplus

This chart from XPS Group’s Bulk Annuity Watch helps quantify how persistent the demand backdrop has been. After the step change in market size since 2019, 2025 looks set to land at around c £40bn of bulk annuity volume, which would make it another very strong year in an already elevated cycle.

Looking into 2026, LCP has forecast buy-in volumes of £40bn to £55bn, with £55bn flagged as a potential record, supported by reported pipeline and growing insurer capacity.

What this means for 2026: I think volumes can remain healthy, but value creation will depend increasingly on pricing discipline and asset sourcing, not just on “winning business”.

Competition is my biggest fundamental concern

If I have one fundamental worry for 2026, it is this. Competition is higher, corporate bond spreads are tight yet buy-in pricing still looks attractive for pension schemes. That combination usually means insurers are having to give away more economics to win deals, because buy-ins continue to look better for schemes than sitting in gilts.

What this means for 2026: the key watch point is whether insurers can keep writing bulk annuities at returns that maintain a decent spread above the cost of capital, or whether competition gradually erodes margins and turns a volume story into a weaker value creation story.

4. Company by company performance, one sentence on what drove it

This section is intentionally short. It explains relative performance without re-telling business models.

The chart below breaks down the 2025 re-rating stock by stock and puts the UK names alongside a small set of Dutch and Asian peers for context. I have included the Dutch and Asian names because they are pure life insurers, so they provide a cleaner point of comparison than more composite insurers. Most UK life names materially outperformed the FTSE 100, with Phoenix, Aviva, M&G, Just Group and SJP all up c 45% to 67% over the year, while L&G lagged despite still delivering a positive return.

The international peers are a useful reminder that 2025 was also a good year for life globally. Even so, the dispersion within the UK cohort remains meaningful, which is why I think the company-by-company drivers still matter heading into 2026.

• M&G (+49%) partly on fundamentals, and partly on renewed bid speculation, helped by the idea that a smaller market cap asset manager can be “in play” post Just Group, and against the backdrop of prior interest, including Schroders exploring a deal in 2021 before dropping it.

• Aviva (+45%) because the market gave more credit for simplifying the group, making it a clearer and easier story to understand, and the CEO rightly received recognition for execution.

• Phoenix (+45%) as investors increasingly saw it as the natural consolidator, with Aegon’s strategic review of its UK business reinforcing the logic that Phoenix is a plausible, and arguably the most credible, buyer given its track record.

• Just Group (+34%) because the Brookfield process crystallised value.

• Legal & General (+16%) not because the business is weak, but because the market is still digesting a relatively new CEO’s strategic direction. A refreshed strategy has been set out, although expectations for a sharper pivot were probably too high.

5. What could go wrong

2025 was a strong year for performance, and it would be too optimistic to see 2026 being as strong. The valuation reset phase is partly behind us, and the next leg depends more on delivery, and on the sector avoiding obvious pitfalls.

5.1 Competition and margin pressure

This remains my biggest concern for the bulk annuity market. Higher competition, tight credit spreads, and keen buy-in pricing can mean value creation is competed away, even if volumes remain strong.

5.2 Asset risk surprises, and the perception of asset risk

Given insurers invest c99% of annuity assets in investment grade credit, I would expect defaults to remain low. But experience of the 2008-9 Global Financial crisis, Brexit and the pandemic tells me that markets re-price risk quickly in a macro shock. Even the perception of rising defaults can push life insurers to underperform, regardless of what the ultimate credit outcome turns out to be.

5.3 Equity market correlation

In a broad equity market drawdown, life insurance shares will fall, even if direct equity holdings are close to zero, because they trade as financials and as risk assets.

6. What 2025 implies for 2026

The key question for 2026 is whether the re-rating that began in 2025 can continue, or whether the sector transitions back to a more normal pattern where returns are dominated by dividends, buybacks, and incremental earnings progress.

The sector finished 2025 strongly, and it starts 2026 with a valuation still supported by high income characteristics relative to the broader market and, in many cases, other UK financials.

The chart below frames the valuation question for 2026 in the simplest possible way, by comparing L&G’s dividend yield with the UK 10-year gilt yield. I use L&G as a proxy for the sector, given its scale, the fact that it has not engaged in transformative M&A and that its rating has often been directionally representative of UK life more broadly.

My view is that UK life insurers should not trade at yields materially above gilts for long periods. I would typically rather own an insurer than lend to the UK Government, given insurers’ diversified cash generation, capital optionality, and scope for distribution growth, and I have written about that view previously in this post here.

Even after the 2025 re-rating, the yield spread remains wide. The gap has tightened to 3.7% as of now, down from the 4% to 6% regime that prevailed through much of 2022 to 2025, but it is still, in my view, unusually high.

This is why the central question for 2026 is not whether income will be delivered, it is whether the market continues to compress the risk premium, or whether returns revert to a more typical pattern dominated by dividends, buybacks, and incremental earnings progress.

7. Final takeaway

In my view, 2025 was the year the market released some of its scepticism towards the life sector. Private equity signalling, extreme starting valuations, and regulatory evidence on resilience combined to compress the sector’s risk premium.

For 2026, I think the upside case is still credible, although my base case is it is unlikely to be as dramatic. The bull case rests on cash delivery, disciplined capital allocation, and bulk annuity economics holding up in the face of rising competition. The valuation backstop is that dividend yields still look attractive versus the wider market, and in my view remain inconsistent with a sector that is genuinely robust.

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Disclaimer
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.

I have spent most of my working life around life insurers, both as an equity research analyst and during a period inside Standard Life, so when the Office for Budget Responsibility (OBR) was in the news again around the recent Budget, my instinct was to compare it with a life office. Both need to project a very uncertain future and turn that into numbers that people can rely on today.

I assumed the OBR would look like a modern life company, with hundreds of people running large models, checking assumptions and producing risk reports. I was genuinely surprised when I discovered that the OBR has just over fifty staff in total, covering the whole economy and public finances. At that point I started to think much harder about how similar the OBR really is to a life insurer and where the differences lie.

In my view, the core problem is this. The OBR still looks, in modelling terms, like a very small life office from thirty years ago, while UK life insurers were forced in the early 2000s to move to a much more modern, stochastic view of risk. The key change was the introduction of stochastic models and tougher capital requirements, which in practice meant insurers had to hold well matched balance sheets rather than rely on a single central projection. That is exactly why I think there are lessons for the OBR in the way UK life insurers now work, and why investors and policymakers should, in fact, trust UK life insurers more than many people seem to do.

Setting the scene, why the OBR is under pressure

The OBR has been under pressure on several fronts. Its forecasts for productivity and GDP growth have repeatedly proved too optimistic, something the OBR itself has acknowledged in its own forecast evaluation work. That optimism has fed through into borrowing, which has often turned out higher than expected in the medium term. On top of that, the latest Economic and Fiscal Outlook was published by mistake before the Chancellor spoke, which raised questions about processes and control as well as the forecast numbers themselves.

I understand why people look at all of that and say the OBR is always wrong. However, I think that misses the real point. Forecasting something as complex as a modern economy is always uncertain. The OBR itself accepts that point forecasts for inflation, GDP or the deficit have almost no chance of being exactly right, and that actual outcomes sit in a wide range around those central numbers.

People say the same thing about all projections, and of course they are never spot on. The difference, in my view, is that life insurer projections are built by very large teams of actuaries, using detailed data and experience to arrive at their best estimate of the future, and then testing that estimate against thousands of alternative scenarios. The OBR is trying to do something just as hard, but with a much smaller team and a framework that is still largely built around a single central path.

In my view, the deeper problem is about how that uncertainty is handled and communicated. The OBR is still working in a mainly deterministic way, with fan charts around the edges. UK life insurers used to operate like that as well. They moved on after some painful lessons. I think the OBR now needs a similar shift in mindset.

Shared DNA, what the OBR and a life insurer both do

If you strip away the labels, the OBR and a UK life insurer are in the same business.

• Both project cash flows many years into the future.
  For the OBR, that means tax receipts, welfare spending and debt interest.
  For a life insurer, it means premiums, claims, expenses and investment income.

• Both use those projections to set hard financial constraints.
  For the OBR, that is fiscal rules and the famous headroom for the Chancellor.
  For a life insurer, that is capital requirements and buffers under Solvency UK, the updated prudential regime that grew out of Solvency II.

• Both face asymmetric consequences when they get the numbers wrong.
  For the OBR, missed forecasts can mean broken fiscal rules, rapid policy shifts and damaged credibility.
  For a life insurer, misjudged assumptions can threaten solvency and invite regulatory intervention.

Both also live with deep model uncertainty. They must choose long-term assumptions for economic growth, interest rates, inflation, demographic change and behaviour. They must guess how taxpayers or policyholders respond to shocks. In that sense, I would say the OBR is more actuarial than many people realise. It brings together a range of departmental and internal models into one picture of the public finances, much as an insurer combines many product models into one picture of solvency and capital.

The issue, in my view, is not what the OBR is trying to do, it is how far behind life insurers it still is in the way it does it.

From deterministic to stochastic, the life office journey

The OBR still relies mainly on a central deterministic projection. It publishes sensitivity tests and fan charts as well, but the political and media focus remains firmly on the single central path for borrowing, debt and headroom.

UK life insurers used to work in a very similar way. Through the 1980s and 1990s many offices relied on deterministic projection models with a small number of alternative scenarios, such as high and low interest rates, rather than a full distribution of possible futures. Asset and liability matching was minimal, with up to 70% in equities held against what turned out to be predominantly fixed liabilities, especially for with-profits business, and the whole approach assumed that reality would stay reasonably close to the chosen central view.

That world began to break down around the dot-com crash and the early 2000s, when equity markets fell and interest rates dropped. In my earlier Substack piece “UK life insurers, haunted by the dot com crash, built for today”, I described how that period exposed weaknesses in old deterministic approaches and left deep scars on the sector.

The regulatory response was important. From 2004, realistic reporting for with-profits business pushed firms towards market consistent valuation and stochastic models, with full distributions of possible outcomes rather than a single line on a chart.

Over the following years, and then under Solvency II, which was introduced across the EU in 2016 and is now known in the UK as Solvency UK, leading UK life insurers built large stochastic modelling capabilities, running tens of thousands of economic and demographic scenarios, often around 100,000 in a full internal model, to assess capital, solvency and profitability. Capital is calibrated to withstand extreme scenarios, usually described as a one in two hundred year event, rather than simply to look comfortable in one central forecast.

In my view, that journey from deterministic to stochastic thinking is the main gap between the OBR and modern life insurers today.

How far has the OBR moved towards stochastic thinking

To be fair to the OBR, it has not stayed stuck in the 1990s. It does now use statistical simulations to help generate the fan charts around its main forecast, and it publishes some analysis of the probability of meeting certain targets, such as debt falling as a share of GDP at the end of the forecast period.

However, these stochastic elements largely sit in the background. The story that ministers tell, and the story that the media report, is still almost entirely about single numbers. This is the GDP growth forecast, this is the borrowing forecast, this is how much headroom the Chancellor has. I think this is where the OBR has not yet caught up with the way insurers and their regulators now think about risk.

In my view, the OBR has some of the right tools, but not yet the culture, governance and communication framework that would make probability based analysis the main organising principle rather than a supporting act.

Headroom as an actuarial idea

The public debate has latched on to headroom as the key number that tells you how safe the public finances are. At the October 2024 Budget, the OBR estimated that the Chancellor had £9.9bn of headroom against her main fiscal rule.

At the November 2025 Budget, that headroom is now around £22bn, as a result of large tax rises and other measures.

These sound like precise and solid numbers. The trouble is that they are still built around a central deterministic forecast. When independent analysts translate the OBR’s uncertainty analysis into implied probabilities of actually meeting the rules, the picture is much less comforting. Estimates of the chance of success can sit in the region of fifty or sixty percent, which is hardly a cast iron guarantee.

A life insurer would never think of headroom in that way.

Capital buffers are defined relative to explicit risk appetite. Management and regulators talk about what probability of staying solvent is acceptable, rather than about a single number in £bn. Under Solvency UK, a 100% solvency ratio means own funds are equal to the solvency capital requirement, which itself is calibrated to a one in two hundred year event, in other words about a 99.5% chance of staying solvent over one year. Most UK life companies currently run with solvency ratios of around 200%, which implies that the probability of staying solvent is extremely high, not just marginally above the regulatory minimum. In my view, that is precisely the sort of thinking that is missing in the current fiscal debate.

If the OBR adopted a more actuarial approach, it would describe headroom as follows.

Under current policy, and given the OBR’s own uncertainty bands, there is some underlying probability that the government will still have headroom and will still be meeting its rules by the end of this Parliament. The OBR and outside bodies have tried to quantify this. When headroom was around £10bn, the IFS suggested the chance of meeting the rules was only about one in five. Even now, with headroom closer to £22bn, press reports suggest the probability of success at a little better than even.

I would much rather the Chancellor stood up and said something like, “On these numbers there is only about a 60% chance that we will still have headroom at the end of this five year period”, and then invited a debate about whether that is an acceptable fiscal risk appetite. A cautious Chancellor might want at least a four in five chance, rather than something that feels close to a coin flip.

Set that alongside UK life insurers, who typically sit on solvency ratios of around 200%, well above the 100% standard that already corresponds to a 1 in 200 year event. The gap between a 60% chance of keeping fiscal headroom and the very high probabilities that insurers work to is huge. In my view, that is precisely the sort of thinking that is missing in the current fiscal debate.

Governance and resources, fifty people versus an entire industry

Resources and governance are another big difference.

The OBR employs just over fifty people across economic, fiscal and welfare analysis. It relies heavily on models and data produced in government departments and then brings those components together into a single forecast, adding judgement where needed. For a watchdog, that is lean and efficient. It also leaves very little capacity for the sort of three lines of defence model governance that is now standard in big insurance groups.

By contrast, the UK life sector has large in house actuarial and risk teams, as well as external auditors and the PRA, all feeding into model governance. Internal models that are used to set regulatory capital must first receive formal permission from the PRA before they can be used, and any major change to those models also needs fresh PRA permission and review. The PRA then carries out ongoing supervision of the models, now through its internal model ongoing review framework, which includes thematic reviews and regular attestations from senior management. External auditors also review the Solvency UK balance sheet, the solvency capital requirement and key internal model outputs as part of their audit of the Solvency and Financial Condition Report and related templates each year. These are not cheap toys. Public commentary suggests that building a full internal model typically costs tens of £m even for a mid sized firm, and can run into the hundreds of £m for the largest groups. In other words, the numbers that come out every six months are the product of large teams, heavy regulatory scrutiny and very expensive infrastructure, not a simple spreadsheet.

That structure was not built because boards wanted a neat governance chart. It was built because earlier failures, including the dot-com period, showed how dangerous under resourced modelling and loose assumption setting could be. I think it is reasonable to ask whether an organisation of fifty people, trying to cover the whole of the UK public finances, can really match that level of model robustness.

For me, this is not about criticising OBR staff, who are clearly capable and committed. It is about recognising that scale, governance and challenge matter when you are turning uncertainty into numbers that shape national policy.

What the PRA stress tests tell us about insurers

If you want to see how far UK life insurers have come, it is worth looking at the PRA’s recent stress tests for the sector. The latest Life Insurance Stress Test 2025 uses a core scenario calibrated to roughly a 1 in 100 year market event, a deep global recession with sharp falls in equities and property, lower interest rates and wider credit spreads, broadly similar in overall severity to the 2008–09 global financial crisis. These exercises then ask firms to show what happens to their capital, solvency and management actions under that scenario, not just in the base case.

The published results show that major UK life insurers remain resilient even under very tough conditions, with solvency ratios staying above regulatory minimums and credible plans for action if things deteriorate further. In other words, their projections are not simply neat central forecasts. They are designed to hold up when the world turns out to be much worse than expected.

I have written about these exercises in two recent Substack notes. “UK life insurers just passed a real world exam” looks at the first PRA announcement, where the results are presented for the sector as a whole. “Have UK life insurers parked the bus on solvency?” follows up on the second PRA stress test release, which shows individual company results. Taken together, they reinforced my view that UK life insurers now live and breathe probability based risk management.

In my view, this is exactly the type of disciplined framework that the fiscal side of the UK state could borrow from.

Why I think the OBR should borrow from UK life insurers

Putting this together, I think UK life insurance has three things the OBR should want.

First, a clear risk appetite language. Insurers now talk naturally about the probability of staying solvent and about how much risk the board is willing to tolerate. Fiscal policy could be framed in the same way, with an explicit discussion of how much risk of rule breaking is acceptable.

Second, stochastic analysis at industrial scale. Large life offices routinely run very high numbers of scenarios, often up to around 100,000, with careful calibration, and use those results every six months when they publish results for investors and analysts, as well as in their regular discussions with boards and regulators. The fan charts in the back of the OBR document could move from being background colour to being the central story, in exactly the same way that full scenario distributions now sit at the heart of insurer reporting.

Third, robust model governance. Insurers have learnt, sometimes the hard way, that models are only as good as the assumptions and checks that sit around them. The OBR could adopt more of that three lines mindset, with more formal challenge of key assumptions and clearer documentation of why assumptions have changed.

None of this would turn the OBR into a life office. It would still be a fiscal watchdog. However, I think it would become a watchdog that describes risk in a more honest and useful way.

Conclusion, why UK life insurers deserve more trust

The OBR and UK life insurers are both in the business of turning an unpredictable future into numbers today. The OBR does it for the public finances. Life insurers do it for balance sheets that back pensions, annuities and savings. On the surface those tasks are very similar.

The crucial difference is that UK life insurers were forced by experience and regulation to modernise their models and their governance, while the OBR still works in a framework that looks closer to the past. Realistic reporting from 2004, and later Solvency UK, pushed insurers firmly into the world of stochastic modelling, explicit risk appetite and much tougher capital standards, raising the hurdle for how much capital they need to hold rather than introducing the idea of capital for the first time. The recent PRA stress tests are simply the latest public proof that this framework delivers resilience in bad scenarios, not only in good ones.

By contrast, the OBR is still treated as if its central forecast were a fact, even though everyone knows it is one possible outcome among many. Debates about £9.9bn or £22bn of headroom crowd out the more important question, which is what probability of breaking the rules the government is really running.

My own conclusion is straightforward.

If we are choosing who to trust with long-dated promises, UK life insurers deserve more credit than their share prices currently imply, given dividend yields of around 6 to 9%. Their numbers are produced inside a framework that faces uncertainty head on, backed by capital and tested under stress. I think the OBR could significantly improve the way it supports fiscal policy by borrowing from that toolkit.

In an uncertain world, the fact that UK life insurers are so far ahead of the very body that models the nation’s finances should itself be a signal. The companies that run far more detailed projections of the future with much greater certainty, backed by capital and verified through PRA stress tests, are exactly the ones that, in my view, deserve to be trusted more than their share prices currently suggest.

Disclaimer
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.

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.

Disclaimer
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.

The Prudential Regulation Authority has released the results of its 2025 Life Insurance Stress Test, LIST 2025, under the new Solvency UK regime. Eleven solo entities took part, covering at least 90% of UK annuity liabilities, so this is effectively a test of the bulk annuity market that is driving so much value creation for the listed life insurers.

When I polled institutional investors, asset risk came out as the number one concern in the sector. That is entirely understandable given the growth of private credit, equity release mortgages and funded reinsurance. Yet the equity market continues to price the UK life sector on dividend yields of roughly 6% to 9% for the main listed names.

LIST 2025 goes straight to the heart of those concerns. In my view it should be supportive for institutional investors who worry that these yields are telling them something sinister about balance sheet risk. It is therefore interesting that share prices have not reacted favourably to the publication. The FTSE 350 Life Insurance index is down about 0.60%, slightly underperforming the FTSE 100, down about 0.25%, as I write this. I see this as good news for the companies, and think the market needs to pay more attention to regulatory releases like this.

What the PRA actually tested

LIST 2025 is a biennial stress test focused on the bulk purchase annuity writers. It has three objectives.

• Assess sector and firm resilience to severe but plausible events

• Strengthen market understanding through publication of individual firm results for the core scenario

• Improve insight into risk management vulnerabilities, particularly around concentrated asset exposures and funded reinsurance

The core scenario is a three stage financial market shock that combines:

• Falling risk-free rates

• Sharp falls in equity and property values

• Widening credit spreads followed by downgrades and defaults

The PRA calibrates this as one severe but plausible scenario that broadly targets 1 in 100 severity, informed by the worst year of the global financial crisis and recent concurrent stress tests for banks.

There are also two exploratory scenarios.

• An asset concentration stress, which applies an additional downgrade to the most material non corporate asset class in the matching adjustment portfolio

• A FundedRe recapture stress, which assumes that the most material funded reinsurance counterparty fails and the cedant has to recapture the business and the associated collateral

Importantly, this is not a pass or fail exercise and it does not set capital requirements or buffers, unlike the Bank of England stress tests for banks. It is designed to be severe, and the PRA explicitly notes that it does not expect all firms to show post stress coverage above 100% in every scenario in every year.

How tough is this scenario in practice

The numbers are interesting.

• The participating firms started from an aggregate SCR coverage ratio of 185% at year end 2024

• Under the core stress, the aggregate ratio falls to 154%, a drop of 31 percentage points

• That fall reflects both a 6% reduction in eligible own funds and a 13% increase in SCR

In capital terms, the scenario wipes out £8.6bn of surplus capital, and £12.9bn of assets are downgraded to sub investment grade.

The Bank of England describes this as a deep global recession style shock, with falling interest and inflation rates, sharp falls in risky asset prices and wider credit spreads. In other words, this is not a gentle sensitivity test around the edges.

Yet even after that shock, every firm remains above regulatory capital requirements. The aggregate 154% outcome is still a comfortable buffer in the context of Solvency UK.

To put that in perspective, when Solvency II first came in, sector solvency ratios averaged 157% (see chart below). Over the last few years investors have become used to seeing headline group ratios comfortably above 200%, and there is sometimes an implicit assumption that anything much below that is weak. LIST 2025 reminds us that a mid 150s ratio after a 1 in 100 type shock is entirely consistent with a strong balance sheet.

What the PRA chart really shows

The chart below breaks down the movement in sector aggregate SCR coverage across the stages of the LIST 2025 scenario and the main risk drivers.

What stands out is that there is no single killer risk.

In Stage 1, the initial market shock, the aggregate solvency ratio falls only modestly, from about 185% to about 180%. Falling interest rates push capital requirements up, but this is partly offset by wider credit spreads, which increase the matching adjustment.

In Stage 2, as downgrades, defaults and property falls come through, the ratio drops to about 154%. This is where credit and property risk really bite, particularly through the matching adjustment and the treatment of riskier assets.

In Stage 3, as markets stabilise, the headline ratio stays at about 154%. Prescribed rebalancing into higher quality assets, together with a set of PRA defined management actions, broadly offsets the impact of spread narrowing and other effects.

The sector is therefore most sensitive to three main risk drivers:

• Interest rate falls, which increase the present value of long dated annuity liabilities and drive up SCR.

• Credit downgrades and defaults, which both reduce own funds and increase capital requirements when assets fall out of investment grade.

• Property stress, particularly through equity release mortgages and the effective value test for the no negative equity guarantee.

However, the test also shows that the sector is not over exposed to any one of these risks in isolation. The move from about 185% to about 154% is a meaningful hit, but not a catastrophic one, which is exactly what you would hope to see from a diversified annuity balance sheet.

PRA chart showing movement in sector aggregate SCR coverage ratio under stress test

PRA notes to chart: Participating insurers’ LIST 2025 submissions and PRA calculations. The sector aggregate SCR coverage ratio is the aggregate of participants’ eligible own funds divided by the aggregate of their SCRs. It allows for recalculation of TMTP at each stage.

What about concentrated asset risk and private credit

A key investor worry is that concentrated exposures in less vanilla asset classes could behave very differently in stress from traditional corporate bonds. The PRA is clearly thinking along the same lines.

In the asset concentration exploratory scenario, the PRA applies an additional 20% downgrade to each firm’s most material non corporate asset class within the matching adjustment portfolio, which often means equity release mortgages, social housing, ground rents or other real asset lending.

The outcome is surprisingly benign at first sight.

• Aggregate SCR coverage falls only one percentage point, from 154% to 153%, across all participants

The PRA is careful to point out that this may understate real world risk. The scenario stresses one asset class at a time, assumes no correlation between different types of real estate exposure and allows considerable portfolio flexibility when only a small slice of assets is affected.

For investors, the message is nuanced.

• The sector can clearly model and absorb idiosyncratic shocks to individual asset classes

• At the same time, correlated real estate and private credit stresses would almost certainly be tougher than this scenario implies

In other words, LIST 2025 reduces the tail of the distribution that relates to concentrated asset risk, but it does not entirely close it off.

Funded reinsurance, recapture risk and systemic concerns

The other big theme is FundedRe. The Financial Policy Committee has already flagged the risk that rapid growth in funded reinsurance could create a systemic vulnerability if a small number of counterparties take on a very large share of credit risk.

In the FundedRe exploratory scenario the PRA looks at what happens if the largest funded reinsurance counterparty fails and the cedant has to recapture all the business with that counterparty. The numbers are again helpful.

• Across the firms that participate in this scenario, £12.3bn of liabilities are recaptured, roughly half of their aggregate FundedRe exposure.

• Their matching adjustment portfolio net liabilities increase by about 6%.

• Aggregate SCR coverage for this subset of firms falls from 154% to 144%.

• The main driver is a 6% increase in SCR, with only a modest 1% reduction in eligible own funds, because most of the collateral is assessed as matching adjustment eligible.

A ten percentage point fall in coverage is not trivial, but the firms remain above capital requirements even after recapturing the largest counterparty in a severe market stress.

Again there are caveats.

• The scenario does not apply a currency stress to the recaptured collateral, even though much of it is denominated in US dollars.

• It assumes today’s collateral pools, which the PRA notes are currently largely matching adjustment eligible.

• The impact would be non linear if FundedRe volumes grew substantially from here or if collateral became more complex and less suitable for matching adjustment portfolios.

For investors, the takeaway is that FundedRe is a manageable source of risk at current volumes, but ongoing regulatory scrutiny is likely to remain intense, and the PRA is explicitly considering whether the capital treatment needs to change. I wrote about Funded reinsurance in more detail in The Case for Keeping Risk Onshore, arguing that with balance sheets in their strongest shape for decades insurers can afford to retain well understood risks onshore and use their capital strength to compound value for shareholders rather than ceding it cheaply for comfort.

Why 154% still looks strong

It is easy to latch on to the 31 percentage point fall in solvency coverage and worry that the sector is more fragile than the current headlines suggest. I think that would be the wrong conclusion.

A few points help to frame 154%.

• The starting point of 185% reflects years of conservative capital management, very strong annuity new business profitability and, crucially, higher interest rates that have reduced the present value of liabilities

• The 160s were entirely normal solvency levels in the early years of Solvency II, before investors started to demand much larger buffers

• The PRA scenario is deliberately harsh, targeting one in one hundred severity and referencing the worst experience of the financial crisis and the recent bank stress scenario calibrations

Against that backdrop, 154% after stress looks more like a validation of current capital strength than a warning signal.

The stock market angle

Set that post stress 154% solvency against how the equity market still values these companies.

The chart below compares historic dividend yields for the main UK listed life insurers with the major UK banks and the FTSE 100 average. The listed life names sit in the six to nine percent range, well above the banks and more than double the FTSE 100 average of about 3.1%. Legal and General and Phoenix are at the top end of that range.

When I asked institutional investors what worries them most about UK life insurers, the ranking was very clear.

• Asset risk

• Regulatory risk

• Lack of cash flow

• Longevity risk

Overlaying all of that is complexity, which cuts across every topic and makes it harder for investors to calibrate the real risks. It is exactly this complexity problem that I am trying to address with Breaking Down the Insurance Black Box.

LIST 2025 speaks directly to the top concern, asset risk. It shows that, even after a very severe recession style asset shock, the sector is still comfortably capitalised at about 154%. The exploratory scenarios then show manageable outcomes for concentrated asset risk and for a significant but survivable FundedRe recapture event.

Put together, strong post stress solvency, contained concentrated asset risk, resilience to FundedRe recapture, and sector dividend yields of six to nine percent, all point to the same conclusion. Equity markets are still applying a sizeable risk premium to UK life insurers. LIST 2025 should, over time, help to narrow the gap between perception and reality.

It is therefore interesting that share prices have not reacted favourably to the PRA release today. As I write this, the FTSE 350 life insurance index is down about 0.60%, slightly underperforming the FTSE 100, down about 0.25%. To me this stress test is good news for the companies, and the market needs to pay more attention to regulatory publications of this kind.

What to watch when firm results are published

The next instalment of LIST 2025 comes when the PRA publishes firm specific results for the core scenario on 24 November. I am not convinced this will be more interesting than the aggregate picture and it will certainly be easier to misinterpret.

The worst way to read the annex will be to ask simply, “who takes the biggest hit”. Different firms have very different mixes of annuity, with-profits and non-annuity business, different levels of matching adjustment, and very different use of reinsurance. A company that has reinsured more of its annuity book should see smaller movements in this stress. Phoenix, which has made greater use of reinsurance than some peers, is an obvious example. That does not automatically make the smaller movement “better” for shareholders, because you give away value when you reinsure.

I absolutely think it is right for life insurers to retain risk where they understand it and where balance sheets are strong enough, which they clearly are today. Writing annuities and managing asset risk is what these companies are good at. In that context a larger movement in solvency coverage is not necessarily a bad sign, it may simply reflect that more of the economics are being held onshore rather than ceded to a reinsurer.

There is a real risk that some readers will focus on the post stress ratios alone. The PRA has already warned that this can be misleading, especially where with profits funds and non annuity businesses distort the regulated SCR ratio.

Final thoughts

LIST 2025 is the first real stress test of the UK bulk annuity writers under Solvency UK. It is severe, it is focused on precisely the risks that worry investors most, and it shows a sector that is robust.

For me the big message is that high asset risk fears are not supported by the stress test evidence. That matters because those fears are a key reason why UK life insurers still trade on very high dividend yields. In reality, genuinely risky models would not be allowed to operate under the PRA’s supervision, given the level of scrutiny applied to annuity writers and the emphasis on pre-emptive supervision.

Over time, greater transparency around LIST results, combined with ongoing regulatory scrutiny of private credit and FundedRe, should make it easier for investors to recalibrate their perception of risk, rather than hunting for “bad actors” that are unlikely to exist in this regime.

It is also worth remembering that the PRA is a tough and conservative regulator with a long track record of digging deeply into life insurer balance sheets. If a PRA stress test says the sector can withstand a deep recession style shock and remain well capitalised, markets should place significant weight on that conclusion, arguably more than they do today.

Disclaimer
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.

When I get into a taxi and the driver asks what I do, I run through the options in my head. “Actuary” isn’t cool, and half the time people have never heard of it. “Banker” hasn’t been cool since 2008. So if I am not in the mood to chat, or I have work to do, I go for the reliable option. I say I work in insurance. That always ends the conversation.

That silence tells you everything about the reputation of life insurance. It is the industry that ends conversations. People think it is dull, bureaucratic, and faintly mysterious. They assume it is either too boring to discuss or too complicated to understand. Yet this is one of the most powerful financial engines in the economy. It quietly channels trillions into corporate bonds, housing, and infrastructure, turning uncertainty into predictable cash flow. The only real mystery is why so few people want to talk about it.

The Myth of What Life Insurance Is

Ask ten people what life insurance means and nine will describe the same thing, a policy that pays your family when you die. That’s the version in TV adverts. In reality, it’s a tiny corner of the market.

Most of today’s profit doesn’t come from death cover at all, but from the opposite: ensuring people can afford to live. Annuities, pensions, and long-term savings dominate modern balance sheets. The mortality risk is usually reinsured away. What remains is a long-term investment operation that manages money on behalf of millions, and promises to pay income for decades.

The modern life insurer is less about death and more about life, managing money so people don’t outlive it.

The Real Business Model

A life insurer makes money in two main ways. The first is fees, through unit-linked products and pension funds, effectively asset management under another name. The second is spreads, through the annuity business: taking in a large sum today, investing it, and paying a guaranteed income for life.

The profit emerges gradually as the investments earn more than the insurer needs to meet future payments. It’s the difference between what they earn and what they owe, released steadily as time passes and prudence unwinds. Life insurance is not about taking bets. It’s about earning a margin from being more patient than anyone else.

This chart also makes clear just how dominant annuities are in driving profit across much of the sector. For most firms, they are not only a core activity but the primary source of earnings. Even for diversified groups like Aviva and Phoenix, annuities still account for the majority of life operating profit. The reason is simple: they are consistently profitable. The predictable cash flows, long asset durations, and prudent reserving all contribute to a steady release of surplus over time.

How the System Got So Safe

At the start of the century, life insurers were riskier. Companies didn’t always match their assets and liabilities precisely. That was fine in rising markets, but when equity markets fell in the early 2000s, the impact was severe. At the time, some insurers had as much as 70% of their assets in equities. As markets slumped, asset values collapsed while liabilities, discounted at lower yields, swelled. The mismatch forced capital raises and bruised reputations.

Stochastic modelling and Solvency II changed that. Introduced in 2004 as part of the UK’s Realistic Reporting regime, stochastic modelling forced insurers to consider a full distribution of outcomes rather than rely on single-point assumptions. It marked a fundamental shift in how risk was quantified. Then, in 2016, Solvency II formalised a broader market-consistent capital framework across Europe, imposing heavy capital charges where assets and liabilities are misaligned. Matching is no longer a good idea, it’s necessary. Today’s balance sheets are far tighter, more transparent, and more disciplined than at any point in history.

They’ve also become materially stronger since the pandemic. Higher interest rates, improved capital generation and tighter asset-liability matching have lifted solvency ratios to record levels across the sector. As the red dots in this chart show, average ratios have risen steadily from around 160 percent in the years before COVID to over 200 percent in the most recent results. The industry came through one of the most volatile economic periods in decades with stronger buffers and greater resilience than before. Yet this strength has not translated into share price performance. Despite the improvement in solvency, the FTSE 350 Life Insurance index remains well below its highs.

When assets and liabilities are aligned, very little can go wrong. Genuine insolvency risk has become vanishingly small. No UK life insurer has gone insolvent since stochastic modelling was introduced in 2004, and none have failed under Solvency II. The last major failure, Equitable Life, occurred in 2000, before either regime was in place, and was driven by precisely the kind of guarantees-without-capital that modern regulation was designed to prevent. With today’s matching requirements, capital buffers and risk models, the chance of a solvent firm collapsing under its own liabilities has all but disappeared.

Why It’s Still So Misunderstood

You might expect that a safer system would mean higher valuations. Instead, complexity has bred confusion. Life insurers report under multiple frameworks: IFRS, Solvency II and, until recently, embedded value, which can move in different directions at the same time. One measure of profit or capital can rise while another falls, depending on assumptions, methodology and market conditions. The same set of results can appear cautious under one lens, strong under another, and weak under a third. It is no surprise that investors struggle to know which story to believe.

Add in a vocabulary that sounds deliberately obscure, with solvency ratios, matching adjustments, risk margins and volatility adjustments, and you have a sector that cannot quite explain itself. Analysts build models using different definitions of “cash generation,” and the companies themselves rarely speak with one voice.

I once went to a European life insurance CFO forum in 2010, held in an airport hotel at Schiphol. I was at Standard Life at the time, and went in place of our CFO, who couldn’t attend. The CFO of Zurich stood up and said, “We have even underperformed the people who caused the financial crisis, the European banks. We need to get our act together.” Everyone nodded. Within an hour, the room had splintered into national agendas and accounting debates. There has been progress since then, but there is still a very long way to go.

This chart starkly illustrates how little has changed. Since the launch of Solvency II in 2016, UK life insurers have returned just 4%, massively underperforming both the FTSE 100 (+57%) and UK banks (+90%). Despite regulatory overhaul, the sector has failed to translate capital strength into investor confidence or consistent equity returns. While macro shocks like the COVID-19 pandemic and mini-budget gilt crisis have played a role, they affected all financials, yet life insurers alone remain stuck.

Fortress Balance Sheets, Fat Yields

Strip away the jargon and the fundamentals look good. Solvency ratios are comfortably above 180 percent. Dividend yields sit between six and nine percent. Capital generation is strong and recurring. Most boards are buying back their own shares, a clear sign of confidence.

These are not fragile institutions, they are overcapitalised compounding machines. Investors have long called for stronger balance sheets, but higher capital levels have also reduced returns on capital. Ironically, the very prudence that was once demanded now seems to be punished. There is a clear opportunity to shift gear, to expand buyback programmes and deploy more surplus capital into annuity business where margins are attractive and long-term demand is growing.

The Trust Problem

The root cause of the discount is mistrust. Investors see models built on assumptions about the future and think someone must be hiding something. But that’s exactly what actuaries do: they make financial sense of tomorrow.

Accountants explain the past; actuaries model the future. Their estimates aren’t perfect, but they’re grounded in data, experience, and constant refinement. The opacity isn’t deception, it’s complexity. And that complexity is measured, monitored and capitalised against under some of the toughest regulation in global finance.

The Opportunity in Misunderstanding

That misunderstanding has created the opportunity. The market undervalues what it doesn’t understand. Yet these companies keep generating predictable cash year after year, funding large dividends and buybacks entirely from internal capital.

When balance sheets have never been stronger, distrust looks misplaced. The irony is that complexity, which should signal sophistication, has become the reason these businesses are still cheap.

The Next Time Someone Says They Work in Insurance…

The next time someone says they work in insurance, don’t switch off. You might be talking to someone managing a trillion pounds of retirement money, matching cash flows to liabilities month by month, and quietly financing the country’s infrastructure.

Life insurance isn’t dull. It’s just been badly explained. At its best, it has a moral purpose too: helping people enjoy longer, healthier retirements with the security of income they cannot outlive.

Disclaimer
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.

The Fashion Business of the Market

“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”
— Warren Buffett

Every decade has its favourites. BlackBerry, Nokia, Yahoo, all once untouchable, now largely forgotten. Manchester United used to be almost certain to win the league, now they no longer look like winning it. Today’s obsession is artificial intelligence, billions chasing the next breakthrough, a thousand start ups promising transformation, and no one really knowing who will still exist when the music stops.

Markets adore excitement, but excitement rarely lasts. Retailers fall in and out of fashion, banks constantly court new customers with teaser rates, streaming services fight to stop people cancelling every month. Loyalty, in most industries, is as durable as a social-media trend.

Even within insurance, some products are not built to last. Motor and home insurance are renewed annually, and price comparison websites make it effortless to switch provider. Insurers in those markets are forced to compete year after year for the same customers, the opposite of permanence.

The One Way Door

Life insurance, and annuities in particular, live in another universe entirely. When a pension scheme transfers its assets and liabilities to an insurer, pension risk transfer, that business can never move. The same is true for an individual annuity. Once someone exchanges a lump sum for lifetime income, that is it. No switching, no upgrades, no renegotiation. The insurer owns that business until the last payment is made. It is the financial world’s one way door.

The Flow That Keeps Coming

While the business is locked in, the cash keeps flowing. Every month, pension payments go out, investment income comes in, and the timing of the two is matched very closely. The insurer builds a bond portfolio so that coupons and redemptions fall exactly when the pensions are due. That match is about removing interest rate and reinvestment risk, it is not what creates the profit.

The profit comes from the margins that were priced in at the start. The assets are expected to earn slightly more than the return implied in the liabilities, and the pricing assumptions on longevity, credit and expenses are set cautiously. As the liabilities run off, the capital that was supporting them can be released. That steady release of capital, together with the small yield margin and the unwinding of prudence, is what shows up in earnings. It is a quiet, predictable engine. No marketing spend to keep the policyholder engaged. Time and mortality do the work.

The Cheapest Cost Base in Finance

Once the contract is written, there is almost nothing left to service. Payments are automated, a sort of reverse direct debit, and that is the relationship. The annuitant does not call. They do not complain. They do not move. They just receive income each month until they do not. The insurer’s job is to keep paying on time. It is administration reduced to its simplest form.

Years ago, when insurers still published detailed FSA returns for each legal entity, you could see this efficiency in black and white. Several companies had subsidiaries that were pure annuity writers, and their expense ratios, expenses as a percentage of assets, were extraordinarily low. I used to analyse those numbers as an equity analyst, and they were always striking. Sadly, that level of transparency disappeared when the reporting changed, but the economics have not. The servicing cost base remains tiny.

A Pipeline Like No Other

Annuity books provide a visible pipeline of profit stretching decades into the future. The assets backing those liabilities run off slowly and predictably, generating cash flow that management can forecast to the year. Most businesses are guessing what next quarter will look like. Annuity writers can see into the 2050s.

The scale of that visibility is impressive. At Legal & General’s recent Retail Investor Day, the CFO said that 60-70% of the earnings in 2028 is already secured. Few industries on earth can make a statement like that.

The Unwritten Rule

This whole argument about the pipeline is not something I have ever written about before. In fact, I do not think I have ever seen anyone write about it. When you are an equity research analyst, you are always looking for an edge, a small piece of insight that others have not spotted. And this idea, that annuity writers have visibility of profits stretching decades ahead, is one of those unspoken truths in the industry. Every insurance analyst knows it instinctively, but no one really talks about it. Yet it is hugely important.

The Year One Illusion

When an insurer writes a bulk annuity, the accounting looks odd. In most industries, you make a profit when you make the sale, sell a jumper, book a holiday, sign the contract, and the cash arrives immediately. In bulk annuities it is different. The insurer takes on a long term liability and must hold capital against it straight away, so at inception the transaction creates a cash and capital strain. On day one it can look like a loss.

The economics sit underneath that. When the deal was priced, the insurer built in small margins, assets expected to earn slightly more than the return implied in the liabilities, cautious assumptions on longevity, credit and expenses, and an allowance for the cost of capital. As the liabilities run off and the risk reduces, capital can be released. At the same time the yield margin and the unwinding of prudence emerge in profit. That is what drives the earnings over time.

The irony is that annuity writers are often marked down up front for this apparent loss, even though what they are really doing is converting today’s balance sheet capacity into tomorrow’s highly visible income stream. The market sees a strain. The insurer sees a schedule.

This chart shows the classic year one strain and then the long, smooth payback from a £10bn UK PRT book. Because it is cumulative, the dip at the start is the initial capital hit in year one, then from year two onwards each year adds surplus so the line only rises. By year four the early loss has been earned back, and after that the surplus just keeps compounding, driven first by institutional retirement profits, then supplemented by asset management fees.

Source: L&G

The Companies That Own Permanence

The UK’s leading players, Aviva, Legal & General, Phoenix, M&G, and Just Group, along with private specialists Pensions Insurance Corporation (PIC) and Rothesay, have built their businesses on this permanence. They compete fiercely to write new deals, but once the contract is signed, the race is over. The cash that flows off those blocks of business is slow, steady, and certain.

It is no coincidence that Brookfield is taking Just Group private. Private capital understands this kind of value, long-dated cash flow with no churn and low operational cost. Public markets, forever distracted by the next narrative, often do not.

It is clear from this chart how annuities dominate the UK life profits of the insurers. The pure writers, Just Group, Rothesay and PIC, earn all their operating profit from annuities. Legal & General, Phoenix and Aviva still have most of their UK life profit coming from that engine, with additional income from other spread and fee based activity. M&G is far less annuity driven, since it has only recently come back into the bulk market, and St James’s Place is a fee based wealth business.

What Could Go Wrong

The beauty of annuity cash flows is how little can actually go wrong. The insurer knows exactly what it has to pay out, the schedule of pension payments is fixed. Against that, it holds a carefully constructed portfolio of bonds, designed so that the coupons and redemptions from those assets match the outgoing pension payments. In practice, it is a very robust model.

There are only two real risks. The first is that people live longer than expected, longevity risk, but that has been moving in the opposite direction. Life expectancy improvements have slowed in recent years, something I wrote about in The Silent Tailwind: How Falling Life Expectancy Has Powered UK Insurers.

The second risk is asset default, but that is where people often misunderstand insurers. The overwhelming majority of annuity portfolios, around 99%, are invested in investment-grade credit. Defaults in that universe are vanishingly rare, even in crises. So while every model has sensitivities, the odds of those cash flows not emerging are close to zero.

Valuation and Visibility

If any business model deserves a valuation premium, it is one where customers can never leave, revenues are contractually guaranteed, and costs barely exist. Yet the market does not seem to agree. Dividend yields across the UK life sector sit between 6% and 9%, higher than all the major banks and markedly above the FTSE 100 yield of around 3.1%.

The chart below shows just how wide that gap has become. These companies distribute some of the most reliable cash flows in the market, yet their yields suggest investors still view them as risky or cyclical. It is a striking mismatch between perception and reality, a permanent business priced as if it might disappear.

Permanence Has Value

Every generation of investors has its BlackBerrys and Nokias, companies that looked unstoppable until they were not. Even Manchester United, once a machine for winning titles, now spends more time trying to get back to that level than actually being there. Warren Buffett said you should only own what you would be happy to hold for ten years. Annuity writers build businesses designed to last fifty.

The companies that specialise in these products, Aviva, Legal & General, Phoenix, M&G, Just Group, PIC, and Rothesay, are quietly running some of the most durable, cash-generative franchises in modern finance. Their customers cannot leave, their revenues are contractually fixed, and their capital releases are predictable for decades ahead.

In a world obsessed with momentum, fashion, and reinvention, these insurers stand apart. They do not need to trend or transform. Their value lies in time itself and in the steady confidence that, while everything else in business changes, the cash just keeps coming.

Disclaimer
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.