New business sales in 1Q 2012 on an APE basis rose 8% to £292m, ahead of the £287m consensus, which was good. Less exciting was the value of new business of £35m (2011: £19m) following lower new business strain (£67m versus £105m), which highlights the challenge of trying to boost margins in current markets. There was no news on the special dividend and it looks as if this will have to wait until the 15th August interim results. We view the payment of this in cash as a key attraction of the stock.
• The feature in the 8% YoY rise in APE (Annual Premium Equivalent) new business sales to £292m (consensus £287m) was the UK. This rose 15% to £197m (consensus £179m). International at £51m (consensus £65m) and Lombard at £44m (consensus £43m) were less exciting.
• We believe there is clear margin pressure given difficult investment markets and an economy in recession. The group saw the value of new business progress well (£35m versus £19m), but this reflected a planned-for reduction in new business strain (down to £67m from £105m). This highlights how challenging things are in the UK life market, in our view.
• Solvency on an Insurance Groups Directive basis saw a surplus of £1.9bn, a little below consensus estimates of £2.2bn, but this remains a positive feature of the group, in our view. Capital is not a concern. The concerns centre on how much more cash can be returned to shareholders and whether management can deliver a beneficial exit.
• There was no news on the special dividend of £250m promised for this year. It seems likely that shareholders will have to wait until the interims on 15th August for an update. The special could be paid in the form of a share buy back. We would view this as disappointing as in the current investment environment, the key attraction of this stock, in our view, is its income potential. The underlying business is not exciting but the potential cash returns for shareholders are, we believe. Management's plan to exit the business in 2014, generating further cash returns for shareholders, looks challenging in the current environment.
• For now our recommendation and sum of the parts valuation remains but if the special dividend was not paid in cash, our enthusiasm for the stock would wane. The shares trade at 1.4x our forecast embedded value (universe average 1.2x) but yield significantly more (universe average 5.7%). For now, we view the stock as attractive for income.
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