If sometimes it feels as though the listed life assurers are moving sideways; that's because they are. None of the big four UK players - Prudential (PRU), Aviva (AV.), Legal & General (LGEN) and Standard Life (SL.) - have managed substantially to change their market fortunes over the past 12 months (see chart below). A mixture of market falls, sector regulation and consolidation amount to a lack of clear direction, but some important hurdles will be cleared this year.
These businesses are increasingly exposed to the markets as they move to regular fee-earning products. Standard Life is the most obvious example due in part to its success in recent years in growing its asset management arm and other businesses where revenue is tied closely to assets under management. This shift means these businesses are less immune to equity market downturns, which helps explain some of the lost progress over the past year - with Standard Life and emerging markets-exposed Prudential especially suffering - and will clearly be an overriding factor in their 2016 fortunes.
At home, they are also managing a decline in the once reliable annuities market. April 2015 saw the advent of 'pensions freedom'. This is a cute banner, but essentially it means that tax changes have made it less costly for people to take more of their retirement savings as a cash lump sum or draw down from it in instalments, rather than being effectively compelled to buy an annuity.
This has forced insurers to look elsewhere to grow their annuity books, and they have worked hard to sell more bulk annuity deals - where a company pays a premium to offload its pension scheme, or part of it, to an insurer. But anyone with experience of the pensions industry knows that this is lumpy business, characterised by big, complicated deals and constant predictions that the market is just about to take off.
It has also led to consolidation, with specialist annuity provider Just Retirement (JRG) merging with Partnership Assurance, and arguably contributed towards Aviva's takeover of rival Friends Life. The Just Retirement-Partnership deal made sense - specialist providers clubbing together in a shrunken market - with £40m of annual savings on offer for the combined entity by 2018. But it is no silver bullet: smaller savers are cashing out of pensions and it is not yet clear that the individual annuity market has hit the bottom.
By contrast, Aviva's deal made little sense at the beginning, with analysts expecting expansion overseas. But the numbers are so far backing up management's enthusiasm. By the end of September 2015, £91m of savings had already been achieved against a target of £225m, and the integration was said to be ahead of schedule.
St James's Place (STJ) is protected against these headwinds to an extent. As a manager that sells life assurance products including pensions and protection alongside other wealth services to its private clients, to an extent it can be agnostic about the product choice. Its funds under management are also stickier than those of its larger peers' fund management arms, so it is less likely to be hit by market volatility.
One matter that is becoming clearer is Solvency II, a new Europe-wide regulatory regime for insurance companies, which came into effect at the start of 2016. Most life insurers submitted an internal capital model for the reform to UK authorities, which were duly signed off. In the coming months we will discover just how well capitalised they are under the new regime, a matter of clear importance for dividends.
Overall, the dust is settling in this market. With each month comes more data on how consumers are responding to the retirement changes. More light on Solvency II will help complete the prognosis for these businesses.
| NAME | Price (p) | Market cap (£m) | PE (x) | DY (%) | 1-year change (%) | Last IC view: |
| AVIVA | 475 | 19,222 | 13.1 | 4 | -7.1 | Hold, 535p, 6 August 2015 |
| JUST RETIREMENT GROUP | 154 | 866 | NA | 2.2 | 13.4 | Hold, 186p, 17 September 2015 |
| LEGAL & GENERAL | 245 | 14,545 | 13.6 | 4.8 | -3.7 | Buy, 262p, 19 November 2015 |
| OLD MUTUAL | 158 | 7,768 | 8.1 | 5.7 | -18.6 | Hold, 229p, 7 August 2015 |
| PHOENIX GROUP HDG. | 868 | 1,956 | 695.1 | 6.2 | 5.6 | Buy, 856p, 21 September 2015 |
| PRUDENTIAL | 1,393 | 35,821 | 12.8 | 2.7 | -7.8 | Buy, 1,500p, 12 August 2015 |
| ST. JAMES'S PLACE | 925 | 4,853 | 26.9 | 2.7 | 15.2 | Buy, 946p, 31 December 2015 |
| STANDARD LIFE | 365 | 7,182 | 5.5 | 4.8 | -10.5 | Buy, 441p, 5 August 2015 |
Favourites
For an income play, we are big fans of Legal & General. It offers a forward dividend yield of 6 per cent, based on the expected payout for the 2016 financial year against its current share price. This is underpinned by its improved cash generation, which has benefited from the strong performance by its asset management arm. Otherwise, life insurance consolidator Phoenix Group (PHNX) has been a reliable income stock.
We also like the long-term prospects of Standard Life and Prudential, if investors can look past the current emerging markets weakness for the latter.
Outsiders
We are concerned about Old Mutual for the same reasons that cloud fellow South African asset manager Investec. The fall in the South African rand, partly due to market concerns at the country's economic mismanagement, is a significant weakness impeding the company's prospects.
