Life insurers were not immune to the market volatility that characterized the first quarter of the year – the FTSE 350 Composite Life Insurers Index ended the period down almost 10%. But falling stock prices are boosting the sector’s appeal for total cash payouts, which this year are expected to average more than 8.8%. Given this, income-minded investors cannot afford to ignore the sector simply because of short-term volatility, especially when companies can provide a natural hedge against inflation through the types of assets. in which they invest.
In fact, for most UK life insurers, the cash yield is now higher than their price-to-earnings ratio. In some cases, the difference is extreme. To M&G (MNG), for example, Berenberg analysts now calculate that the combined cash returns via dividends and redemptions reached a 19% return. And M&G is not alone. Berenberg believes that all UK life insurers are currently earning more than their valuations, although the difference is not as extreme at companies like Aviva (AV.) and Phoenix Group (PHNX). Particularly, much of the capital generation the industry is currently experiencing comes from organic growth. Overall, with the exception of Aviva, very little of this cash comes from liquidations or book divestitures, and therefore represents strong generation of capital by the underlying business.
The pandemic has had a counter-intuitive impact on the life insurance industry as the main effects have been delays in new business decisions, which have now started to normalize. Decisions on de-risking balance sheets by transferring liabilities from defined benefit pension funds to the life insurance industry rest with pension fund administrators – and there is every indication that this year normal business flow will return. for the block annuity market, rather than the lumpy deals that meant the second half of 2021 saw a rush of delayed deals. Although taking on the risk of pension liabilities is capital intensive, the volume of business emerging as more and more cohorts of baby boomers retire has simply been too great for life insurers ignore it, which in itself must represent a profound demographic change as the UK population ages.
According to consultancy LCP, annuity buyouts could reach more than £30bn this year, with Aviva, Standard Life and Legal and General (LGEN) all taking significant shares of business. LCP expects between £30 billion and £50 billion of annualized risk reduction activities by 2025, with around £650 billion over the next decade. Despite the dominance of the Big Four, smaller niche players are also set to win significant business this year in the sub-£50m wholesale market. Phoenix has also established itself as a key player in the annuity market through a series of timely acquisitions.
The other attraction this year for investors is that life insurance companies have a natural hedge against inflation. Although premiums can be increased to protect underlying revenue, the rate of customer turnover makes it a limited tool to protect revenue. On the other hand, the projects in which life insurance companies can invest, which include real estate and infrastructure, mean that their invested capital has a natural increase in income, because these investments are generally accompanied by “more CPI/RPI” in their contracts.
In addition, the variety of permitted investments for UK-based insurers is set to increase under Solvency II rule reforms, broadening the base of permitted investments to include areas such as renewable energy and infrastructure projects. in large scale. Insurers should also benefit from a 60 to 70% reduction in their risk margin. It’s hard to say whether this will immediately impact earnings, but it should at least give them more flexibility in how they deploy their capital.
|NAME||Price (p)||Market capitalization (millions of pounds sterling)||12 months (%)||Before PE||Yield (%)||Last seen IC|
|Aviva||444||16,372||11.0%||ten||6.8||Buy, 414p, March 2, 2022|
|just group||91||941||-13.0%||5||2.1||Buy, 86p, February 3, 2022|
|Legal and General Group||265||15,834||-2.0%||8||7.4||Buy, 253p, March 9, 2022|
|Phoenix Group||626||6,259||-14.0%||8||8.0||Buy, 635p, March 14, 2022|
|Prudential||1,072||29,459||-26.0%||12||1.3||Buy, 1095p, March 9, 2022|