Following Osborne’s Budget bombshell, what now for UK insurance stocks?

25th March 2014

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UK life insurer shares plummeted following the Chancellor’s Budget Speech during which he sounded what some have described as the death-knell for annuities writes Philip Scott.

On Wednesday the George Osborne declared: “Let me be clear. No one will have to buy an annuity.”

In the biggest shake-up of the UK’s pensions industry in decades, Osborne said: “Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want.”

To date retirees have generally been required to swap their pension savings for an annuity, which provides them with an income for the rest of their life.

But the Government is now going to consult on how savers can draw their entire pension as a lump sum from April 2015. Annuity providers such as Aviva, Legal & General and Partnership, witnessed their shares freefall on the day and over the past week the UK’s listed Life Insurance industry has seen a fortune wiped off its value as the sector overall slid 5%.

More than 400,000 annuities are sold by insurers and specialist companies to retirees every year. The product however has long been dogged with accusations of being bad value for money, where for example, a £100,000 pension savings would convert to an annuity of just around £5,000 a year.

But analysts at Barclays are now expecting sales to freefall, in a note to the market, it stated: “We believe the UK Budget has the potential to lead to the demise of the UK individual annuity market. Our base case is now that the individual annuity market could decline by two-thirds from £12bn to £4bn per annum within the next 18 months.”

We look at the state of the main players and how the market currently views their potential right now.

Just Retirement and Partnership Assurance

While the FTSE 100 listed giants boast businesses that stretch beyond the pensions market, some of the smaller annuity specialists including Just Retirement and Partnership Assurance witnessed their shares respectively collapse by a hefty 48% and 61% respectively in the three trading days following the Budget announcement.

Brokers at Barclays have now walloped Partnership with a double downgraded to ‘underweight’. Alan Devlin, equity analyst at Barclays says: “In our view, the stocks that will be hardest hit are the mono-line individual annuity companies, including Partnership and similar business models. The Chancellor’s budget has potentially destroyed their new business franchises. Unfortunately for Partnership, 90% of their sales came from individual annuities, and because of the short duration products and use of reinsurance, 80% of earnings are booked on new business, and only 20% from the in-force book.

However analysts at Panmure Gordon and Nomura both reiterated their ‘buy’ holdings on the shares of both groups following the Budget and the consensus, against expectation is positive towards the FTSE 250 firms.

Aviva

Down 7% since Budget day, the broker consensus views the UK’s largest insurance firm and annuity player, with 20% of the market share, as a ‘cautious buy’. Earlier this month the group cheered investors after delivering delivered a £2.2bn profit in its latest update, and a 3.4% forecast dividend – after a £2.9bn loss after tax last year. But the UK listed firm has plenty of international interests and only about 50% of overall sales come from the UK as the firm trades in France, Holland and Poland. As a result of its global footprint, some believe it will be the least impacted by the impending pension system changes given the diversity of its businesses.

Standard Life

Standard Life generates more of its earnings from annuities than either Legal & General and Aviva and hence the impact from a collapse in the annuity market is slightly higher. But the business has a strong international reach, with operations in a number of regions from Edinburgh to Hong Kong and boasts more than 7m customers. Post Budget, Deutsche reiterated a ‘buy’ and the general sentiment is pointing to a ‘strong hold’. Devlin says: “Standard Life is arguably one of the best positioned for the collapse in the annuity market, given it is the largest player in both the SIPP and drawdown market, and a large player in the intermediary platform market. It is likely to retain the majority of its volumes, although likely at lower fee revenues.”

Resolution

Among the blue-chips overall, resolution was worst hit over last week, after falling 14% between March 14 and 21. In the three trading days since the Budget, it is off by almost 10%. The firm is the insurance vehicle of entrepreneur Clive Cowdery, who paid £1.86bn for life insurer Friends Provident in August 2009. Currently a ‘hold’ by market consensus, Barclays however is positive on its prospects having reaffirmed its ‘buy’ recommendation of shares after the Budget, chiefly as a result of the firm’s sector-leading prospective dividend yield of 6%, as well as a “predictable and defensive cash profile and increasingly strong operational performance”.

Prudential

The UK’s second largest annuity provider has been targeting growth beyond the UK. With has operations around the world in the US and Asia it also owns asset manager M&G Investments. Keith Bowman, equity analyst at Hargreaves Lansdown says: “Given its big focus on Asia and the Far East it is less vulnerable to change than others in the British market such as Legal & General, which is much more UK-centric.” The group’s shares are only off by 2% since Budget day and are rated a ‘strong buy’.

Legal & General

Deutsche may have reiterated a post-Budget ‘buy’ recommendation but market sentiment says ‘hold’. The shares are off 11% in the three trading days since Osborne’s bombshell but Devlin sees the fall as an attractive entry point. He says: “Although L&G is seen as a large annuity player, in 2013, only 31% of its annuity volumes were in individual annuities. L&G is focused primarily on the bulk annuity market, which we think offers a significant growth opportunity and could easily offset any loss of individual annuity sales. Furthermore, with the leading IFA platform and as a leading corporate pension provider, we see L&G as a prime beneficiary in these businesses where the focus is on savings.”

(Share price data to March 24, 2014)

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