Deutsche Bank reviews UK life assurers; notes uncertain outlook

The bank said most UK life assurers continue to offer the potential for structural long-term growth with attractive dividend yields, but their share prices are currently wading through a morass of uncertainty.

Arguably the biggest question mark is the outlook for world markets, which have historically been one of the key drivers of the segment, DB said.

Other issues include Solvency II, which it thinks will prove less negative than is perhaps perceived, UK pension reform and ‘Bexit’ concerns.

Near-term, Deutsche expects these issues to remain a drag on performance - at least relative to European peers - with the potential for some volatility as sentiment swings back and forth.

It downgraded Prudential to ‘hold’ from ‘buy’, saying it faced the greatest amount of uncertainty, especially where slowing Asian growth and exposure to US credit markets was concerned.

“These have dominated the share price so far in 2016, but a deeper, more structural issue is that the US (40% of earnings) is also losing momentum – with net inflows set to slow to 3% by 2018.”

The bank sees both St James’s Place and Standard Life as strongly positioned and said they are likely to show the best underlying growth of the companies it analyses.

However, DB noted that their performances have diverged greatly, with St James’s Place outperforming Standard Life by nearly 30% over the last year.

“UK pension reform and nervous equity markets are potential risks for both, but we think the risk is higher on both fronts at SJP – with a greater proportion of higher earners amongst its customers and estimated gearing of 1.2x to equity markets (vs Standard Life at 0.3x–0.4x on our estimates),” it said.

It added that with SJP trading on 22x estimated 2017 earnings versus Standard Life at 12x, the latter offers the better risk-reward.

It upgraded Standard Life to ‘buy’ from ‘hold’ and downgraded SJP to ‘hold’ from ‘buy’.

The bank kept its ‘buy’ rating on both Aviva and Legal & General.

At 1215 GMT, Prudential was down 0.2% to 1,373.50p, St James’s Place was down 1% to 912p and Standard Life was up 1.5% to 368.40p.