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What's the damage? City debates outlook for insurers
Shares in Partnership Assurance continued to slide today as analysts assessed the Budget's impact on high-yielding insurance stocks.
(Update) The post-Budget rout of shares in specialist annuity provider Partnership Assurance (PA.L) showed no signs of abating today as analysts debated the impact of the chancellor's pension reforms on the company and its larger rivals in the life insurance sector.
Partnership is down 9.2%, or 13.1p, at 129.9p, after its share price more than halved yesterday. It was hit by plans announced in yesterday’s Budget for an overhaul in pensions legislation which would remove the need for many people to buy an annuity when they retire. An annuity is a life insurance contract that converts an individual's pension savings into an annual income for the rest of his or her life.
Partnership: 'exceptional buying opportunity'?
Panmure Gordon analysts Barrie Cornes and Keith Baird argued the hammering Partnership took yesterday, when its share dropped by 55%, was an overreaction, and represented ‘an exceptional buying opportunity’.
They claimed it had dropped to a valuation that was close to assuming no new business would be written, but that while the annuity market would be reduced by the government’s plans, there would still be demand for the products.
‘Share prices have been hit hard to the point where we think the market is assuming no new annuities will be written going forward,’ they said. ‘We think the product will still be acquired given the need for security of income in old age.’
They even see some positives for Partnership from the Budget, pointing to chancellor George Osborne’s pledge that savers will be given the automatic right to face-to-face advice on retirement. This could lead to those who do decide to buy an annuity shopping around more for the best option rather than relying on their pension provider, a trend which Panmure sees as positive for Partnership, which offers ‘enhanced’ annuities – those that offer a better rate for those with poorer health conditions.
Fellow specialist annuity provider Just Retirement (JRG.L) has suffered similarly, dropping 11.5p or 7.6% to 142.2p, after a 42% drop yesterday. Panmure Gordon believes that, as with Partnership, this represents a buying opportunity.
Or damaged beyond repair?
Others are less optimistic. Analysts at Barclays dealt Partnership a double downgrade, moving it from 'overweight' to 'underweight', warning it could fall further even after yesterday’s battering. It argued the Budget could lead to the demise of the UK individual annuity market, with sales plunging by two-thirds from £12 billion to £4 billion a year within the next 18 months.
This will prove particularly painful for Partnership, which concentrates solely on annuities and whose business model ‘is potentially irrevocably damaged’, according to Barclays.
‘Yesterday’s Budget has severe ramifications on the business model of Partnership, which is particularly acute given new business accounts for nearly 98% of its profitability in any one year, and individual annuity sales account for 90% of total sales,’ it said. It has cut its price target for the company by two thirds to 125p.
Canaccord Genuity lowered its price target to 130p and predicted a run-off of the business as the most likely outcome of the Budget bombshell. ‘We would note that additional costs could be incurred in run-off which could make a discount appropriate, albeit that some level of new business may be maintained in the near term,’ it said.
Blue-chip insurers weather storm
The picture for larger insurers is less bleak, with annuities representing just one flank of their operations, and a large proportion of those earnings being derived from historic and bulk annuity business, both of which are unaffected by the Budget announcements.
That did not stop large falls in their share prices yesterday. Legal & General (LGEN.L), Standard Life (SL.L), Resolution (RSL.L) and Aviva (AV.L) fell by 8.4%, 3.9%, 4.6% and 5% respectively following the Budget.
Legal & General and Standard Life have staged modest recoveries today, rising 1.3% and 1.2% respectively, while Aviva is largely flat, up 1.3p to 491.7p. Resolution, however, has continued its decline, dropping a further 14.9p, or 4.5%, to 320p.
Analysts at Bernstein Research, Shore Capital and Barclays have all judged the drop in Legal & General’s share price to have been an overreaction. Barclays said the drop represented a buying opportunity, arguing that while the insurer was a large annuity player, a large proportion of its business was in bulk annuities sold to corporate customers, where it could offset any slump in the individual market. Shore Capital meanwhile argued that Legal & General’s fund management arm could benefit from the annuity changes.
Resolution’s statement to the market this morning that it could benefit from greater pension savings as a result of the Budget changes has done little to sway the market’s focus on the impact of a decline in annuity sales.
While Shore Capital has maintained its 'hold' recommendation, saying it was ‘unconvinced by Resolution’s strategy and product offering’, other analysts believe that, as with other large blue-chip insurers, it is suffering from a market overreaction.
Edward Houghton, senior analyst at Bernstein Research, claimed the sell-off in Resolution looked ‘a little overdone on the basis of our initial impact estimates’. Barclays has meanwhile reduced its price target by 4.5%, but at 361p this is still well above the current level. ‘The dividend is safe and well covered for many years, although unlikely to grow unless it can find an alternative avenue for growth,’ it said.
Standard Life and Aviva, both big annuity players, are nevertheless tipped to ride out the shake-up to legislation due to the diversity of their businesses. Standard Life generates more of its earnings from annuities than either L&G or Aviva, but Barclays pointed to its position as the largest player in both the Sipp (self-invested personal pension) and drawdown market as a potential offset to a decline in that business. Aviva meanwhile has the largest annuity business in the UK, but its diverse operations, including a substantial general insurance arm not shared by many of its peers, will limit the impact of yesterday’s changes, according to Barclays.
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- Partnership Assurance Group PLC
- Just Retirement Group PLC
- Legal & General Group PLC
- Standard Life PLC (SL.L)
- Aviva PLC (AV.L)
- Resolution Ltd (RSL.L)
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