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Analysis: Lloyds keen to hold on to profitable Widows

Advisers and analysts say Lloyds is unlikely to sell Scottish Widows in the short term as it prepares to launch an assault on the bancassurance market.

Earlier this month, reports emerged suggesting Lloyds had received a multi-billion-pound bid for Widows from Edmund Truell, founder of private equity firm Duke Street. Truell is looking to launch a new acquisition venture called Tungsten.

Lloyds moved quickly to scotch the rumours. A spokesman said: “Scottish Widows is absolutely not for sale and no bid has been received.”

Last year, a number of reports suggested Lloyds chief executive Antonio Horta-Osorio would offload Widows following a strategic review, with analysts pointing to a potential £7bn stock market flotation.

But in June 2011 Lloyds said it would retain its insurance arm as it looks to profit from the “mass market” advice gap after the RDR.

Lloyds plans to sell Widows’ investment, protection and savings products through the bank’s high-street branches.

Radcliffe & Newlands chartered financial planner Mel Kenny says Lloyds’ decision to focus on bancassurance means it makes sense for the bank to retain Widows.

He says: “Lloyds is looking to build up its bancassurance business. If they wanted to do that without Widows, they would have to tie up with somebody else who can offer the products, and that would come with an additional cost.

“Scottish Widows is a strong brand, so it would take a significant change in strategy or a last resort need for cash for Lloyds to sell.”

Osorio may also be keen to keep hold of the bank’s life and pension business for a more fundamental reason – it continues to make money. A quick glance at the financial performance of Widows in relation to the rest of the bank over the past four years confirms this.

The profits of Lloyds’ life, pension and investments businesses over the past four years have been £826m (2008), £617m (2009), £830m (2010) and £886m (2011). To put this in context (and discounting the impact of Government support) Lloyds as a whole made losses of £6.7bn in 2008 and £6.3bn in 2009, followed by profits of £2.2bn in 2010 and £2.6bn in 2011.

Hargreaves Lansdown pension investment analyst Laith Khalaf says: “Scottish Widows has remained profitable during difficult times for Lloyds and its performance will inevitably be boosted by automatic enrolment.

“However, I think its annuity business will come under a lot of pressure as more people shop around. Widows’ rates are not competitive and it will start to lose business once the ABI’s new code of conduct is introduced.”

The provider plans to launch a competitive enhanced annuity suite in the next year to compete in the IFA open market, alongside an IFA protection proposition.

Investec analyst Kevin Ryan says the implementation of higher capital requirements for insurers across Europe, through Solvency II and Basel III, could eventually force Lloyds to part company with Widows.

He says: “Since Widows was purchased by Lloyds, there has been a great fudging of capital between the two. This will unwind through Basel III and Solvency II and when this happens I think Lloyds will look to divest.

“Banks with an insurance subsidiary have always counted the capital within the insurance business as part of the bank capital. But you cannot use insurance capital which backs a pension or somebody’s savings to back a loan, for example.

“Basel III will unravel that, so if you have an insurance company the capital will need to be entirely separate. Solvency II will make demands of insurers to hold more capital, so a combination of those two things will make the bank consider selling or an IPO.

“However, given the difficulty of current market conditions, I cannot see this happening in the short term.”

Windows: deal or no deal?

April 26, 2011
Reports surface suggesting Lloyds is preparing to sell Scottish Widows as part of a review by chief executive Antonio Horta-Osorio

April 28, 2011
Money Marketing reports investment analysts’ view that Widows could launch a £5bn-£7bn stockmarket flotation

June 30, 2011
Lloyds decides to retain Widows, launch an execution-only platform and place bancassurance at the centre of its future strategy

February 16, 2012
Widows chief executive Toby Strauss sets out the provider’s intermediary strategy which includes a big annuity push and returning to the IFA protection market.

May 1, 2012
Lloyds denies reports it has received a multi-billion-pound takeover bid for Scottish Widows from Edmund Truell


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