Jd7f16 Jul 2016 00:59
Pensions freedom and annuities
Since the introduction of the pension freedom changes in April last year, sales of individual annuities have declined across the sector. For Standard Life, diversification has meant a shift towards asset management via its fund manager, Standard Life Investments. While this has increased the group's exposure to market risk, it has helped to offset the decline in annuities. Yet, even with the rocky market conditions that began during the latter part of last year, Standard Life Investments grew its operating profit by a third, as it has cemented its popularity with institutional investors, including pension scheme managers.
For Legal & General, sales of individual annuities fell by 45 per cent last year. However, the group is the best placed of all the life insurers to increase its bulk annuity business, whereby the insurer takes on the liabilities of a defined-benefit pension scheme. Management views this as a less capital-intensive way of growing its returns. Last year, L&G completed the UK's largest medically underwritten bulk annuity contract. However, this has its own challenges, with long lead times to complete deals and lumpy revenue streams as a consequence.
However, the pressure is more intense for both Aviva (AV.) and Prudential. The insurers have been marked out as two of the nine "global systemically important insurers", according to the International Association of Insurance Supervisors. This means that from 2019 they are expected to have higher capacity to absorb losses than other insurers. This explains Aviva's sector-beating Solvency II coverage ratio of 180 per cent. The group was helped by its acquisition of Friends Life last year, which it expects to boost the cash remitted by the UK life business by around £1bn over the next three years.
Favourites
As expected, Standard Life's UK individual business is shrinking following the government's regulatory changes. However, it has built a strong position in the UK workplace savings segment, helped by strong inflows into its wrap platform and rising auto-enrolment contributions. Indeed, UK pensions and savings assets under management increased to £132bn last year (from £128bn in 2014). However, the jewel in its crown is still the asset management business. Not only is this diversifying risk, but it is offsetting falling annuity sales. Admittedly, this does mean the group is more at the mercy of volatile markets. As a result, shares in the group are 13 per cent below our 2014 buy tip. However, the shares are trading on just 12 times forward earnings and have a prospective yield of 5.9 per cent this year, according to UBS. We think the investment case remains intact. Buy.
Outsiders
Aviva has certainly strengthened its balance sheet - it managed to reduce its combined ratio of claims to income by 1.1 percentage points to its best reading in nine years at 94.6 per cent. The integration of Friends
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