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Insurer share prices rocket despite year of pensions turmoil

UK insurers have seen their share prices rocket in the last 12 months despite a tumultuous year of political change and huge drops in annuity sales.

In the past year, the nation’s biggest pension providers have left the stagnating FTSE 100 in their wake, rising by up to 20 per cent.

After the Budget bombshell on pensions flexibility the share prices at UK insurers tumbled for those reliant on individual annuity sales.

In the same week, pension providers were hit with a 0.75 per cent cap on charges for auto-enrolment funds, forcing them to put hundreds of millions aside to deal with the fallout.

Insurers were also rocked by an FCA review into their backbooks after a botched briefing saw shares tumble.

Despite the rollercoaster year, Aviva, Legal and General, Standard Life and Prudential have delivered huge double digit growth to shareholders.

On 22 November 2013, Aviva’s share price was 439p but had surged 22 per cent to 535p at the close of markets on 19 November 2014.

Using the same time period, Legal & General’s share price was 212p rising 16 per cent to 245p, Prudential shares rose 19 per cent from 1265p last year to 1505p and Standard Life is up 18 per cent from 350p to 414p.

Friends Life’s share price has remained static over the year despite good results and is down 3 per cent from 345p to 336p.

Scottish Widows, which is part of Lloyds Banking Group, and Aegon, part of a multi-national, have also seen their share prices hold steady.

Over the same November timeframe the FTSE has stagnated, rising from 6674 to 6696.


Equity analysts predict new sales on individual annuities will drop 50 per cent this year and another 50 per cent next year – 75 per cent in total.

But big insurers who are not reliant on new annuity business can still churn massive profits from their existing books.

The UK has annuity stocks of around £200bn but in 2013, before the Budget, there was only £13bn of new annuity business.

Any decline in new business will have a more gradual impact as profits fall away over decades, rather than the next few years.

For example, up to 25 per cent of L&G profits come from UK annuities but only 1 or 2 per cent of that was delivered by new business.

In its Q3 interim management statement, L&G reported a 53 per cent slump in individual annuity sales from £1bn to £508m year-on-year.

Analysts say up to 30 per cent of Prudential’s profits come from its UK life business but its focus is on serving existing customers, rather than  winning new business.

In its Q3 interim management statement, Prudential reported a 47 per cent drop in individual annuity sales from £1.61bn to £861m year-on-year.

Annuity sales at Aviva were down 32 per cent year-on-year in Q3, from £2.5bn in Q3 2012 to £1.7bn in Q3 2013. Standard Life saw annuity sales fall 67 per cent in the same period.

Deutsche Bank equity analyst Oliver Steel says: “The pension changes have seriously changed the model for the at-retirement market. The more reliant on individual annuities, the more likely you are to be hit. But assuming you were an asset-gathering insurer then you are likely to have gained.”

Even big insurers with large existing books face possible headwinds with senior politicians threatening to “unwind” annuities and the potential for the FCA’s market study into annuities to force big changes to policies.

Bulk annuities

As well as servicing their backbooks, pension providers see rich pickings in the bulk annuity market.

L&G has actually sold more annuities this year than in 2013 because of a successful drive into bulk deals. Bulk annuity sales for the nine months to September this year were £3.37bn, up 29 per cent compared to the £2.6bn of new business secured during the same period in 2013. The provider today confirmed it has secured a record-breaking deal worth £2.5bn.

In August, Aviva reported a £300m bulk annuity deal with Interserve Pension Fund as more firms seek to transfer their defined benefit liabilities.

Sanford C Bernstein equity analyst Edward Houghton says: “Firstly, has the death of annuities been exaggerated? When we move into higher interest rates will people be tempted to by annuities again? Maybe.

“Secondly, will these companies be able to diversify? There is a huge potential bulk annuity market which should continue to grow as rates rise and deficits reduce on DB pension liabilities. Just Retirement and Partnership are inevitably looking at bulk as an alternative way of driving profits.”


There is also the prospect of increased drawdown sales and a different at-retirement market post-Budget.

Some firms argue the drawdown market could create a new revenue stream to match the loss of individual annuity sales.

Houghton says: “Standard Life and Friends Life, for example, have large pension books and used to convert at least some of these pensions into annuities when customers retired, which has been very profitable for them.

“With the changes made to the retirement market at the Budget, annuity sales are declining, and more customers are expected to draw down on their pension assets, using income drawdown products.

“Providers with large pension books are hoping to keep a greater proportion of customers’ assets at retirement, as they choose to drawdown. Pension providers are saying they don’t think it’s so bad. But I am skeptical as the margins on income drawdown products are much, much lower than annuities.”

Big insurers also have large overseas operations with Prudential in Asia and Aviva in the United States which also acts as a bulwark against changes to UK pensions.

For smaller specialists the stock market has not been so kind to them over the last 12 months.

Partnership’s share price has crashed 77 per cent from 309p last 22 November to just 100p on 19 November while Just Retirement has seen a less dramatic drop of 32 per cent from 186p to 127p.

While bigger firms with big overseas operations and large backbooks have coped, the impact of the Budget has still had a massive impact on pension firms.


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