Resolution has cancelled an intended £250m payout to shareholders after reconsidering the expected capital requirements of Friends Life.
The group had intended the make the payout in the first half of 2012. It made a similar return to shareholders in 2011.
But it now said it would be inappropriate to make another payout following “careful consideration of the expected future capital requirements of Friends Life Group against a backdrop of heightened investment, economic and regulatory uncertainty”.
Resolution said the group’s capital position remains robust and that Friends Life had, at the end of June, an estimated IGCA surplus of £1.9bn.
Resolution Limited chairman Mike Biggs said: “I understand that shareholders will be very disappointed that the board has concluded not to return a second £250m of capital, but it would be inappropriate to do so against the backdrop of heightened investment, economic and regulatory uncertainty.”
The insurance company’s shares fell 9.9% to 205.3p following the announcement of the U-turn, although it had warned in March that falling stock and bond prices might make it impossible to deliver.
Resolution, created in 2008 to buy and merge underperforming life insurers, has lost 15% of its value so far this year, lagging an 11% increase for the broader STOXX Europe 600 insurance index (SXIP). The firm said its British life operation was financially robust with a capital surplus of £1.9bn as of June 30, adding its dividend policy is unchanged.
Analyst Edward Broughton at brokerage Sanford Bernstein said Resolution’s decision was driven by regulatory pressure on the insurance sector to strengthen its reserves amid faltering economic growth and ahead of Europe’s tough Solvency II capital rules for insurers. “We believe the UK regulator is strongly encouraging all UK life insurance companies to reserve conservatively given current macro-economic uncertainty and in anticipation of the future implementation of Solvency II,” Broughton wrote in a note.
Life insurers’ earnings have been hit hard by a double-whammy of weak sales and low interest rates, while volatility in stock and bond prices triggered by the eurozone sovereign debt crisis has created increased uncertainty among investors over their capital strength.
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