Oliver Ralph, Insurance Correspondent
Shares across the insurance sector fell heavily in the wake of Britain voting to leave the EU, with many in the industry concerned about the impact of the referendum result on Lloyd’s, London’s insurance market.
One of the big attractions to insurers of operating via Lloyd’s is that it has passporting rights into the EU. Many of the insurers who do business there at the moment say that after a Brexit they will simply shift some of their business to subsidiaries within the EU, bypassing the Lloyd’s market in the process.
Lloyd’s, which campaigned heavily for a remain vote, was putting a brave face on the result on Friday morning. “I am confident that Lloyd’s will stay at the centre of the global specialist insurance and reinsurance sector,” said John Nelson the market’s chairman, adding: “The attractiveness of the Lloyd’s platform goes far beyond licences: robust financial security, global brand strength, and unrivalled underwriting expertise. These qualities have stood the test of time.”
Shares in the life assurers were worst affected, as investors fretted over the impact on both their balance sheets and their profits. Aviva was one of the worst hit with its shares down 16 per cent.
“For many in the market this is viewed as the key ‘Brexit’ stock in the sector with its big European presence and currency exposures,” said Eamonn Flanagan, analyst at Shore Capital. He added that about a quarter of the group’s profits came from continental Europe.
In a statement, Aviva said that the vote would “have no significant operational impact on the company. Aviva’s operations in the UK and its other subsidiaries in the EU are well capitalised and continue to trade as normal.”
The insurer also said that it had “one of the strongest and most resilient balance sheets in the UK insurance sector with low sensitivity to market stress.”
Shares in Legal & General were also down heavily, falling 15 per cent. Here, the concern was not so much activities in Europe but the impact of the vote on financial markets. Legal & General has a large annuity business, which is backed by a portfolio of corporate bonds. Widening credit spreads would hit the value of those bonds. Mr Flanagan points out that, as insurers hold bonds to maturity, that may not matter unless there is an increase in defaults by large companies.
Prudential, which has large businesses in the US and Asia and little exposure to continental Europe, was down just 10 per cent. In a statement to staff chief executive Mike Wells said: “We do not expect the result to cause any significant change to our operations in the foreseeable future.”
Life assurers’ asset management operations are also expected to suffer because of the market turmoil. “The market fall will hit annual management fees,” said Mr Flanagan. “Their cost bases are fixed and when the market goes up they have operational gearing on the upside. On days like today, it’s the opposite.”
The impact on the non-life insurers was more muted, given that many of them have little cross-border business and hold very conservative investment portfolios. Shares in Direct Line, RSA and Admiral were all down in mid-single digits.
Not everyone in the industry may have given much thought to the Brexit question, however. A survey by law firm Kennedy’s ahead of the referendum found that “most firms said it was too early to undertake detailed contingency planning until the outcome of the vote was known. To do otherwise risked incurring unnecessary cost.”