Life assurers of all persuasions should benefit as the economic recovery continues. A strengthening jobs market, for example, should reduce financial pressure on households, which should in turn bolster demand for life and savings products. The inevitability of rising interest rates - even though that may not begin until 2016 - is also a positive: modestly rising rates should improve life assurers' investment returns, reducing the risk of their failing to meet guarantees on investment products.
But in 2015 it's political reform, rather than macroeconomic considerations, that seems most likely to influence sentiment. Chancellor George Osborne's shock decision in the Budget last March to scrap the compulsory purchase of individual annuities is still rocking the sector. That change - which won't be fully implemented until April - appears to have created two classes of life assurer: those capable of benefiting from the change and those still struggling.
Heading the list of likely winners is Standard Life (SL.). Along with most UK life players, Standard Life has seen its personal annuity sales slump: its third-quarter figures revealed a 55 per cent slide year on year. But it's also well positioned to benefit from growing demand for alternatives to annuities. Standard's drawdown product offering is seen by sector analysts as a market leader, not least because the group already boasts £10bn-worth of assets under management in the area. The group is benefiting from other reforms, too. It has been busy grabbing a bigger share of the pension auto-enrolment market, for example, with 290,000 customers added in the first three quarters of 2014, up from 137,500 a year earlier.
Another clear winner is likely to be St James's Place (STJ), the upmarket life assurer and wealth manager. That's because pension reforms should also give retirees more power over their investment decisions, and the group's ability to offer high-quality advice through its equivalent of a salesforce - the St James's Place Partnership - leaves it well placed to benefit.
Meanwhile, other big life assurers look set to continue compensating for falling individual annuity sales by growing other business lines. For Legal & General (LGEN), plummeting sales of individual annuities are being more than offset by a booming bulk annuity book: new business premia in this area more than quadrupled in the first half, to £3.1bn.
Similarly, the success of Aviva (AV.) with bulk annuities and its focus on alternatives to individual annuities, such as equity release products, leave it relatively well protected. Moreover, Aviva is in the midst of acquiring Friends Life (FLG) in an all-share bid. That will more than double Aviva's corporate pension assets under management, further relieving pressure from the decline of individual annuity sales.
That said, the deal hasn't won universal applause: not only is Aviva's offer seen as full by some analysts - which is good news for Friends' shareholders, less so for Aviva's - but it has also raised questions over Aviva's strategic direction. At the time the bid was announced in November, sector analyst Barrie Crones of broker Panmure Gordon noted that it didn't easily fit with "previous comments by management concerning its desire not to be so UK-focused". The move bolsters Aviva's exposure to the UK market, which is mature and highly regulated.
Predictably, annuity specialists continue to be hit hardest by the Chancellor's move. Two stand out: Just Retirement (JRG) and Partnership Assurance (PA.). Shares in both tanked on Budget day and a rerating has so far proven illusive. Sales remain heavily under pressure: Partnership's third-quarter individual annuity sales were barely a quarter of their level the previous year, while Just Retirement reported a 59 per cent sales slide with its first-quarter figures in November.
Research from Hargreaves Lansdown this month revealed that over 70 per cent of investors still want a guaranteed income in retirement, which suggests demand for annuities won't simply disappear. And neither company is simply waiting for a recovery. Partnership is cutting costs and has identified the US care annuity market - which helps customers insure against the cost of retirement homes - as a potentially attractive niche. Just Retirement is hacking away at costs, too, and its management wants to develop a new range of products that will continue to offer the income certainty associated with annuities, only with greater flexibility.
| Company | Share price (p) | Market value (£m) | PE ratio | Dividend yield (%) | 1-year performance (%) | Last IC view |
| Aviva | 529 | 15,611 | 7.8 | 2.9 | 11.4 | Hold, 502p, 8 Aug 14 |
| Friends Life | 400 | 5,635 | 56.7 | 5.3 | 12.0 | Buy, 322p, 7 Aug 2014 |
| Legal & General | 259 | 15,372 | 16.3 | 3.8 | 13.5 | Hold, 231.2p, 6 Aug 2014 |
| Old Mutual | 198 | 9,720 | 11.1 | 4.3 | 2.0 | Hold, 189.1p, 8 Aug 2014 |
| Phoenix | 813 | 1,830 | 5.6 | 6.6 | 9.7 | Buy, 735p, 26 Aug 2014 |
| Prudential | 1,578 | 40,507 | 28.3 | 2.2 | 18.3 | Buy, 1,535p, 4 Dec 2014 |
| Just Retirement | 136 | 682 | 8.4 | 1.8 | -43.3 | Hold, 142p, 19 Sep 2014 |
| St James's Place | 827 | 4,296 | 28.5 | 2.2 | 7.0 | Buy, 767p, 29 Jul 2014 |
| Standard Life | 405 | 9,695 | 15.7 | 4.0 | 5.5 | Buy, 382p, 20 Oct 2014 |
Favourites:
While shares in Prudential (PRU) aren't especially cheap - they are trading on about 1.4 times analysts' end-2014 forecast for embedded value (net asset value plus the profit stream from life policies) - the group looks well set for growth. That's because it is heavily focused on growth markets in Asia as well as the US, where the baby-boomers are now retiring in legions, leaving it far less exposed than its big peers to the UK's mature and rapidly changing market. Closed-life fund Phoenix (PHNX) is also attractive. It's throwing off cash as the book winds down - meaning a prospective yield of over 6 per cent - while the annuity reforms have only modest implications.
Outsiders:
Trading at a significant discount to end-2014 forecasts for embedded value, shares in annuity specialists Just Retirement and Partnership Assurance are certainly cheap. Moreover, with the annuity market unlikely to disappear entirely, and both companies looking to restructure, a rerating is not out of the question. But in our view it will take quite some yet for sentiment, let alone sales, to shift back their way, leaving the shares likely to struggle in 2015.
