Like most companies, life assurers make their own destiny, but to some extent a lot depends on how equity markets perform and how economic conditions affect customer behaviour. For example, the current squeeze on disposable income might encourage more people to pay down debt instead of saving for the future. Or in some cases many people simply will not have enough money to make regular savings. In fact, recent research by Legal & General shows that around 2.8m households are worse off now than they were three years ago. Put another way these people no longer have the spare cash to make provisions for later in life. And what little money there is left over each month has been used to reduce debt.
Looking ahead, the chances of a double-dip recession are estimated to be pretty low, which means that it is far more likely decent investment returns for life assurers will replace the huge write down in equity valuations that occurred during the peak of the financial crisis and global economic downturn. Beyond that, there is a considerable amount of uncertainty and upheaval looming on the horizon. Life assurers are constantly having to adjust in order to take on board what has turned out to be a stream of regulatory changes, especially since 'A' Day, which effectively deregulated much of the pension market. More changes are due as compulsory annuity purchases are phased out, while the inexorable decline in the final-salary pension should be making pension holders look around for the best deal. Companies are also anxious to reduce their exposure to pension schemes altogether by paying for a third party provider to administer the company pension scheme.
And European regulators are also busy attempting to strengthen and harmonise the life insurance and savings sector throughout Europe. Much work has been done by the Committee of European Insurance and Occupational Pensions Supervisors, but nothing is set in stone. What seems most likely though is that life assurers will have to strengthen their regulatory base and comply with new regulations, almost certainly an onerous and very expensive task. And the regulatory side is complicated enough already, with IFRS, EEV and MCEV accounting standards all used to present annual accounts.
One thing remains clear, life assurers will have to find more money to meet stiffer capital requirements, and for the smaller operator this could involve raising fresh capital or modifying the range of products available to reduce the number of capital intensive products on offer.
Life assurers also need to address the problem of operating in more mature markets as found in the G7, with Asian markets offering considerably more potential because of the relatively low penetration levels. But sponsoring this sort of expansion can be expensive, leading to speculation that a life assurer could sell off a major part of its business in order to fund such an expansion.
Of course, an outright takeover of an operation already established in an emerging market economy has obvious attractions, but the fiasco of Prudential's failed bid for the Asian business of US insurer AIG - not to mention the cost of around £370m - has obviously injected a note of caution, although it didn't stop Royal & Sun Alliance making a tentative approach to Aviva for its general insurance business, which Aviva rejected out of hand. Yet strangely enough, the sector's most successful newcomer Resolution has, under the capable stewardship of Clive Cowdery, tapped the market twice for funds to buy Friends Provident and the UK life business of French insurer Axa.
|NAME||PRICE (p)||MARKET CAP (£m)||PE RATIO||YIELD (%)||1 YEAR PRICE CHANGE (%)||LAST IC VIEW|
|LEGAL & GENERAL||105||6131||6.5||3.9||30.5|
|PHOENIX GROUP HDG. (LON)||621||1064||211.6||0.0||-7.7||na|