When is a life assurer not a life assurer? In the case of Standard Life (SL.) it could be sooner rather than later after finance director Jackie Hunt hinted that its 188-year-old status as a life assurer could be changed. The idea stems from the fact that net inflows of third-party assets managed by Standard Life Investments grew 160 per cent to £3bn in the first quarter, taking total assets managed to £90.4bn. And that's more than the group manages for its own policyholders. While such a change could have positive valuation implications for the shares, it also goes to highlight the impressive growth being achieved by the group in this area.
- RDR-ready business model
- First-quarter new business up 24 per cent
- Third-party asset management growing strongly
- Attractive yield
- Relatively small exposure to fast-growing Far East markets
- Canadian margins still weak
The traditional life side is also performing strongly. In fact, in the first three months of this year, new business sales of long-term savings plans increased by 24 per cent to a record £6.3bn, with net inflows up 26 per cent and contributing £1.4bn of the £2.8bn group net inflows. There are a number of reasons behind this impressive result, not least the implementation of pension auto-enrolment for a number of existing corporate clients, as well as a number of new pension schemes starting up. The other key driver is the implementation of changes made in the wake of the Retail Distribution Review (RDR). From the start of this year, independent financial advisers (IFAs) cannot earn a commission from product providers by selling their policies. The obvious way to make up for this is to charge customers a fee for advice, which is what the company did by introducing adviser charging on its wrap platform last year. Importantly, business generated through its IFA partners hasn't been affected by the commission ban because Standard Life has never paid a commission on product sales since floating in 2006.
Standard Life has also been diversifying its revenue stream away from the UK. The numbers are still relatively small, but offering new products and streamlining the business operation have paid off. In Germany, for example, new savings products have been launched to help customers avoid the worst effects of market volatility, while new branches have been opened in Singapore and Dubai, adding to its already established operations in India and China. Even so, the group still lags behind the likes of Prudential (PRU) when it comes to exposure to fast-growing markets in the Far East.
| STANDARD LIFE (SL.) | ||||
|---|---|---|---|---|
| ORD PRICE: | 388p | MARKET VALUE: | £9.15bn | |
| TOUCH: | 387-388p | 12M HIGH: | 392p | LOW: 191p |
| DIVIDEND YIELD: | 4.2% | PE RATIO: | 13 | |
| NET ASSET VALUE: | 185p | EMBEDDED VALUE: | 345p | |
| Year to 31 Dec | Gross premiums (£bn) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2010 | 3.24 | 971 | 18.4 | 13.0 |
| 2011 | 3.34 | 595 | 13.0 | 13.8 |
| 2012 | 4.32 | 996 | 29.7 | 14.7** |
| 2013* | 5.19 | 759 | 25.6 | 15.4 |
| 2014* | 6.23 | 861 | 28.9 | 16.2# |
| % change | +20 | +13 | +13 | +5 |
Normal market size: 5,000 Matched bargain trading Beta: 1.40 JPMorgan Cazenove estimates, profits and earnings not directly comparable with previous years **Not including a special dividend of 12.8p a share #Not including forecast special dividend of 17p a share | ||||
However, the biggest non-UK operation is Canada, where operating profits last year rose by 90 per cent to £355m. Much of this was achieved thanks to a positive investment performance, but fee-based revenue also rose 4 per cent to £172m as a result of a 7 per cent rise in assets under management to £27.8bn. But these improvements only came after new management and a revised product offering turned around the 33 per cent drop in new business sales in the first quarter of 2012, and margins are still lower than elsewhere in the business.
Valuing a life assurer is fiendishly complicated, but one of the conventional metrics is the relationship between the share price and the embedded value, which is a measure of the group's potential profits, taking into account an element of as yet unearned premium income on policies already in place. On this score, shares in Standard Life are pretty much trading on an historic premium that's much in line with rivals such as Prudential. However, looking at broker Investec's forecast EV for 2013, shares in Standard Life look cheap, trading at just a 4 per cent premium compared with Prudential's forecast 20 per cent premium.
Group finances are in pretty good shape, too, and the surplus of funds held over and above the minimum standard set out in the Insurance Group Directive (IGD) moved up from £3.1bn in the first quarter of last year to £4.2bn. And, in the light of last year's solid cash flow, management announced a special 12.8p-a-share dividend - the shares are already ex-dividend for this payment. The dividend forecast for the current year translates into a yield of 4 per cent, rising to 4.2 per cent or 8.6 per cent, including another special dividend forecast for 2014.
