When António Simões left HSBC in mid-2020 after more than a decade to become Santander’s head of Europe, it was a natural progression as he grabbed the next rung of the global banking ladder.
Next week the Portuguese executive returns to London to take up a less familiar challenge — running one of the UK’s most prominent insurers, Legal & General.
The company, which is also the country’s biggest asset manager and provides pensions to millions of UK savers, has been run for more than a decade by Sir Nigel Wilson, who has reshaped it in an ethos of “inclusive capitalism”, using its own balance sheet to finance science parks, start-ups and build thousands of homes.
The City grandee will be a “tough act to follow”, according to one top-30 L&G shareholder, who described Wilson as a “constant” through a period of change for the sector that has included retirement and regulatory reform, Brexit, Covid and the market turmoil following last year’s ill-fated “mini” Budget.
However, analysts say he is leaving behind a group that is being shunned by some investors because of its credit exposure at a time of rising interest rates and its strategic focus on the capital-intensive business of taking over corporate pension obligations through so-called bulk annuity deals. Even insiders are keen for the next big idea.
“The current model will deliver for years, but what comes after?” said one person familiar with the board’s decision to choose Simões.
The appointment as CEO of a banker with no insurance experience was a surprise to some analysts who expected a continuity candidate with knowledge of L&G’s investment engine, which includes financing projects such as build-to-rent properties that can then be packaged up in investment funds or used to back corporate pension liabilities.
Those with knowledge of the board’s thinking highlight the similarities between Simões and Wilson. Both are alumni of consultancy McKinsey and came to insurance as outsiders — Wilson’s first job in insurance was at L&G, joining from events company UBM.
Investors are keen to identify the next avenue of growth for the group. Simões has held talks with investors in recent weeks, according to people familiar with the matter, and is expected to set out his stall around the middle of 2024.
One ambition for the board and investors will be for L&G to expand its international operations and to look for growth outside of the bulk annuity market, which provides the biggest share of its profits. In addition to various UK and European roles, Simões formerly ran HSBC’s global private banking business.
L&G has “so far failed to emulate its domestic success abroad”, said the top-30 shareholder, citing plans to expand the asset management arm into Europe and Asia, among other drives. “It’s therefore interesting that the board has decided to appoint a new CEO . . . with greater international experience”. L&G declined to comment.
The group has hailed recent momentum in the US, where it says it has sold record numbers of individual life insurance policies this year while cumulative volume from bulk pension deals since 2015 has passed $10bn.
But despite an end-of-year rally, L&G’s shares are down about 6 per cent over the past three years, against growth in the FTSE 100 of around 16 per cent. Like peers, L&G’s dividend yield has pushed up, and is now at nearly 8 per cent.
Analysts cite domestic pressures on the stock including a shrinking institutional investor base for UK income stocks and a lack of interest from overseas investors.
“The UK domestic investor base has been hollowed out,” said Andrew Crean, a senior analyst at Autonomous. “It’s that, combined with the antipathy of international investors to the UK economy.”
UK life insurers, as heavy holders of credit to back their pension liabilities, have also become the focus of concern over their exposure to rising interest rates.
“The market is clearly saying, ‘we are worried about balance-sheet risk’,” said Andrew Baker, an equity analyst at Citi.
L&G said it had reported “no material property or credit writedowns” in the first half of 2023, and has had zero defaults on the credit backing its annuities since 2010.
The top-30 shareholder said that “as most of these corporate bonds are held to maturity and the experienced level of default has been very low, this appears to be largely a function of the fickle nature of markets rather than a problem with the group’s strategy”.
The focus on credit risks has been twinned with questions over what happens when the current wave of bulk annuity business slows. L&G currently expects to do £8bn-£10bn of UK deals a year, but investors are already thinking ahead to when the pool of companies with a legacy defined benefit pension scheme has shrunk significantly.
“It’s a market that at some point will run out,” said Citi’s Baker. “As that whole market matures . . . does [L&G] just become a run-off company? It’s not like that’s tomorrow, but it is something that the company needs to start thinking about.”
Options include growing capital-light businesses such as defined contribution pension savings and wealth management. “Ultimately [bulk annuity deals] are a melting ice cube, they will disappear to nothing,” said Autonomous’s Crean.
Over a shorter timeline, investors are hopeful for more clarity on near-term capital returns. Some analysts think there could be scope for the new CEO to announce a share buy-back but others think the group is still more likely to put capital to work in extra bulk annuity deals. Jefferies portrays the group as “caught between a bulk and a buyback”.
Whether Simões doubles down on the bulk annuity market in pursuit of growth or puts greater stress on shareholder returns will be a key first test of his intention, investors say.
“His first port of call is to build his reputation, and his credibility with investors,” said Crean.
