Widows to be spared after Lloyds review

SCOTTISH Widows is expected to be retained as a key part of Lloyds Banking Group when chief executive António Horta-Osório unveils his plans at the end of this month.

It is understood the three-month, "no sacred cows" review of Lloyds' businesses has convinced him the life assurer is too valuable, given its strong cash flows and strategic balance, for the bank to sell.

The vote of confidence in Scottish Widows will lay to rest speculation that Horta-Osrio was poised to pull the plug on the Edinburgh-headquartered insurance subsidiary in a move away from the "bancassurance" model to focus on high street banking and mortgages.

It is believed the Portuguese chief executive, poached from rival Santander to succeed Eric Daniels earlier this year, has decided that Widows can help shore up the bank's frayed relationship with its investors.

Sources say Horta-Osrio believes that the cash thrown off by Scottish Widows will help in the restoration of Lloyds suspended dividend.

The bank, 41 per cent owned by the taxpayer after the bailout following its troubled acquisition of HBOS, was prohibited by the European Union from paying a dividend between January 2010 and January 2012 in return for state help.

It is also understood Horta-Osrio has been influenced by expected changes in Basel III, the global regulatory standard on banking capital and liquidity. It is set to allow banks to use up to 10 per cent of assets in non-banking subsidiaries to go towards their group capital ratios in the new European regulatory framework. Previously banks have not been allowed to put capital in their non-banking businesses towards their group capital buffers.

Eamonn Flanagan, insurance analyst at Shore Capital, said: "Quite simply, there is no reason for Lloyds to sell Widows to meet regulatory capital requirements."

Lloyds, which owns Bank of Scotland and Britain's biggest mortgage lender Halifax, bought Widows for 7 billion in 1999. After a rocky period when stock market returns hit all insurers in the early years of the new millennium, Widows' robust cash flows allowed it to "repatriate" nearly 2bn in capital to its parent group between 2005 and 2007.

Speculation that Widows, which includes the Scottish Widows Investment Partnership (SWIP) fund management business, would be auctioned was fuelled at Lloyds' annual results in February. However, City analysts said this weekend that Lloyds' recent appointment of Aviva's chief UK operating officer Toby Strauss as the bank's new group director for insurance suggested that Widows was to be retained.

Strauss takes up his position in October. "Strauss is coming in four months' time. There's no way Lloyds are going to announce in June they are planning to knock out (sell] Widows," one analyst said.

Lloyds declined to comment ahead of Horta-Osrio's strategy statement on 30 June.