Share tip of the week: healthy insurance company
By
Paul Hill Sep 18, 2009
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Given that, for months, the Square Mile has been fretting about insurers' balance sheets, it would be all too easy to dismiss Standard Life. But that would be a mistake, because this asset manager is one of the healthiest.
Established in 1825, Standard Life provides life assurance, pensions, investment management, banking and healthcare insurance products for 6.5 million customers worldwide. The group operates principally in the mature British market, but also has exciting prospects in Canada, Germany, India and China.
What's more, because of its conservative approach it enjoys robust capital ratios and in August unveiled one of the sector's highest solvency surpluses (at £3.1bn), giving it a buffer of 217% above the regulatory minimum. And thanks to a number of clever hedging contracts, even if equity markets were to fall 40% (putting the FTSE 100 at 3,000 points), the surplus would still be a decent £2.2bn.
Standard Life (LSE: SL.), rated a BUY by Merrill Lynch
But Standard Life isn't just a balance-sheet story – there are plenty of new business opportunities that should see it deliver internal rates of return of 16%. With corporate pension schemes closing fast, it's seeing an influx of new money from employees who are being forced to switch to self-selected personal pensions. The firm is the market leader here and will be boosted by the gradual cessation of generous public-sector schemes, a trend that will increase sales of its bread-and-butter savings and annuity products.
Looking at its overseas interests, the company announced last week that it was merging its Chinese JV with Bank of China, the world's fourth-largest bank by assets. This deal will widen the firm's distribution reach, potentially allowing its services to be sold to another 140 million domestic consumers. Standard should also be well placed to benefit from the crack-down on international tax evasion, such as new disclosure requirements for off-shore account holders in Switzerland and Liechtenstein, as funds are repatriated onshore.
The shares have dropped around 30% over the past two years, so the current price is an attractive entry point for income seekers. In its interim release the firm not only lifted its dividend, but also reported £156bn of assets under management, £167m of positive cash flow and closed June with a net asset value (based on a European economic value, or EEV) of 265p a share. Costs are also down, with the group on track to realise another £75m in savings by 2010.
So where are the risks? Standard Life would suffer if there was another equity or property market collapse, or if life expectancies rose above existing predictions. It also faces regulatory risk from the introduction of proposed new legislation from Europe in 2012 (ie, Solvency II). If enacted this would almost certainly require an increase in capital reserves. Even so, I'm not put off, as I would value Standard Life at a 10% discount to its EEV net assets, or about 240p a share. So there's 20% upside potential, plus a hefty 5.9% dividend yield.
Recommendation: BUY at 197p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments
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