Chancellor George Osborne's Budget day decision to scrap the compulsory purchase of annuities by those with a defined contribution pension sent shares in life assurers tumbling. Mono-line annuity providers Partnership Assurance (PA.) and Just Retirement (JRG), for instance, saw their shares slide 55 per cent and 43 per cent, respectively, on the news. In contrast, Standard Life's (SL.) shares fell just 3 per cent on budget day and they've risen 11 per cent since. That's because Standard could well emerge from the shake-up as one of the life sector's winners, leaving its shares - which trade only a little above forecast embedded value (net asset value, plus the profit stream from life policies) - looking too cheap.
- Annuity changes offer opportunities
- RDR and autoenrolment proving a boost
- Growing asset management fast
- Attractive dividend yield
- Modest emerging market presence
- Lacklustre Canadian performance
Certainly, the chancellor's move is likely to mean lower individual annuity sales - analysts at Barclays estimate that the UK's individual annuity market could even decline by two-thirds in just 18 months. Moreover, Deutsche Bank reckons the group generated about 9 per cent of its operating profit from new business annuity sales in 2013 - so the decision will not be without pain for Standard. Indeed, it has a greater exposure to annuity sales than rivals such as Legal & General (LGEN) and Aviva (AV.). But Standard is also likely to more than compensate for that by selling retirees other kinds of products. That's because it's "the largest player in both the SIPP and drawdown market", notes Barclays. Its position as a leading asset manager is another plus point given that the chancellor's reforms were designed to encourage saving. "We would expect asset gathers to be net beneficiaries," reckons analyst Oliver Steel of Deutsche Bank.
Other rule-based changes are also helping Standard. Take the retail distribution review (RDR), for instance - that was introduced at end-2102 and banned commission payments to independent financial advisers (IFAs). Again, some of the upside there will come from the removal of compulsion regarding annuity purchases. Specifically, the RDR doesn't allow IFAs to receive commissions from selling annuities, but they can levy an annual management charge for selling drawdown-type products. Accordingly, IFAs have incentives to sell precisely those products that Standard Life is a big player in. More generally, business generated through the group's IFA partners wasn't affected by the introduction of RDR as it axed commission-based product sales back in 2004 - leaving it better prepared than most for the post-RDR world.
STANDARD LIFE (SL.) | ||||
|---|---|---|---|---|
| ORD PRICE: | 393.3p | MARKET VALUE: | £9.4bn | |
| TOUCH: | 393.3-393.4p | 12-MONTH HIGH: | 422p | LOW: 323p |
| FORWARD DIVIDEND YIELD: | 4.7% | FORWARD PE RATIO: | 12 | |
| NET ASSET VALUE: | 177p | EMBEDDED VALUE: | 353p | |
| Year to 31 Dec | Gross premiums (£bn)* | Operating profit (£bn) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 3.43 | 0.53 | 13.0 | 13.8 |
| 2012 | 4.32 | 0.87 | 28.3 | 14.7† |
| 2013 | 4.13 | 0.75 | 19.7 | 15.8 |
| 2014* | - | 0.78 | 23.9 | 17.0 |
| 2015* | - | 1.00 | 31.7 | 18.3 |
| % change | - | +28 | +33 | +8 |
*Canaccord Genuity forecasts, gross premiums forecasts not availiable Normal market size: 5,000 Matched bargain trading Beta: 1.60 †Excludes 12.8p special dividend | ||||
Pension autoenrolment is another big opportunity and, in 2013, a third of FTSE 350 companies had established schemes with Standard in order to meet their obligations here. True, that's pretty low margin business and there's also the possibility that margins could be squeezed further should the government introduce a charge-capping regime. But that doesn’t worry management - it believes the group’s highly automated approach to offering the product should keep costs sufficiently low to allow for decent margins.
Progress as an asset manager, essentially for third parties, is also impressive. In 2013 its total assets under management rose 12 per cent to a hefty £244bn and that’s set to be boosted further by the £68.6bn of funds that will come with the £390m acquisition of Ignis Asset Management from Phoenix. Indeed, broker Cannacord Genuity estimates that fees earned from the group's assets under administration should rise by a third in 2014 to £324bn.
Still, unlike a rival such as Prudential (PRU), the group hasn't been especially successful at tapping the impressive emerging markets growth story. It does boast a presence in Hong Kong, Singapore, Dubai, India and China and new business sales here rose 21 per cent last year. But these operations also made a £6m operating loss in 2013 and total assets under management reached just £1.9bn. Meanwhile, Standard's Canadian operation has been hit by Canadian dollar weakness. New business sales there fell 19 per cent in 2013 and operating profit slumped 29 per cent to £251m.
