Life assurance companies face a number of challenges this year, most of which centre on fresh legislation. Perhaps the biggest dilemma stems from the way regulators have pretty much put the sector into the same boat as banks and are planning to introduce a heap of new financial requirements that the industry is fighting hard to resist. Regulators plan to focus on activities that they deem to be atypical and to oblige companies to create significant capital reserves as part of a move to protect against a financial collapse.
But the list includes such activities as variable annuities, which form a chunk of life assurers' regular revenue streams. There are also doubts about third party asset management that need to be cleared. The battle with the regulators is likely to take up a lot of time and effort in the coming year. And after six years in the making, the Retail Distribution Review has finally been implemented. Perhaps the biggest change will apply to independent financial advisers who will no longer receive a commission for selling a life player's products, but will instead have to encourage its clients to pay a fee for any investment advice. IFAs are important to the industry because around three-quarters of annual premium equivalent sales come through this channel. The effects of RDR remain unclear, although most observers expect to see a dip in new life sales as the market adjusts to the end of commission payments and the introduction of a fee-based service for financial advice.
What's more, hopes of building on bancassurance agreements have been dashed, as one high street bank after another has announced its withdrawal from the sale of savings and investment products. In fact, the customer is likely to suffer because free advice is no longer on the table. This, together with the continued squeeze on disposable incomes, will make it tough to maintain momentum in what is regarded as a relatively mature UK market. And there are plenty more changes on the way. Two new regulatory bodies are expected to start operating this year – the Prudential Regulation Authority and the Financial Conduct Authority that will split prudential supervision and business conduct into two frameworks.
On a brighter note, pension auto-enrolment is being introduced in stages, and could expand the size of the corporate pensions market as more employees start paying into a pensions fund. But, while auto-enrolment is expected to mean more pensions business, there is no clear evidence that take-up will be strong. Many people with already squeezed incomes may choose to opt out. On the investment side, interest rates are set to remain at historic lows for some time to come, which will weaken operating performance by reducing new business margins. But the key to higher growth rates is probably to ensure a bigger exposure to emerging economies where penetration of life protection and pension policies is still relatively small.
| COMPANY NAME | LATEST PRICE (P) | MARKET VALUE (£M) | PE RATIO | DIVIDEND YIELD (%) | PERCENTAGE CHANGE IN 2012 | LAST IC VIEW |
| AVIVA | 382 | 11,251 | 5.4 | 6.8 | 24.0 | Buy, 383p 4/01/13 |
| LEGAL & GENERAL | 149 | 8,786 | 7.0 | 4.5 | 41.6 | Hold, 128p 7/08/12 |
| OLD MUTUAL | 182 | 8,880 | 12.3 | 3.2 | 30.9 | Hold, 168p 8/08/12 |
| PHOENIX | 548 | 956 | NA | 7.7 | 3.8 | Buy, 488p 23/08/12 |
| PRUDENTIAL | 902 | 23,054 | 12.3 | 2.8 | 35.6 | Buy, 794p 10/08/12 |
| RESOLUTION | 250 | 3,540 | NA | 8.2 | -1.6 | Buy, 227p 22/11/12 |
| ST JAMES'S PLACE | 425 | 2,156 | 19.8 | 2.1 | 29.9 | Buy, 399p 8/11/12 |
| STANDARD LIFE | 343 | 8,083 | 8.6 | 4.1 | 61.0 | Buy, 274p 14/08/12 |
