Partnership Share Discussion Threads

[rathkum] 21/3/2014 11:28

Not all doom and gloom. This from Money Week today. Buy 5*

The annuities market is going to shrink massively

I want to focus on the two biggest post-Budget casualties: Partnership Assurance (LSE: PA) and Just Retirement (LSE: JRG).

Partnership closed last night at 124p, down from 319p before the Budget, while Just Retirement closed at 145p, down from 267p.

Both companies focus on providing annuities – in particular, annuities for people with health or lifestyle issues. So if, for example, you're a diabetic and you retired last year, there's a strong chance that Partnership or Just Retirement would have offered you the best annuity deal in 2013.

As I said immediately after the Budget, I see both companies as 'good guys' in this industry. Until now, the large life assurance companies have made big profits by offering poor annuity deals to customers who already had pension pots with them. Sadly, too many customers didn't realise they had the right to shop around and get better annuities elsewhere.

However, Just Retirement and Partnership aren't big pension companies. That means that all of their customers have already 'shopped around', and as a result signed up for market-leading annuities.

A fair proportion of these customers have had serious illnesses such as cancer. Others have 'lifestyle' issues such as smoking or heavy drinking. (If you're a smoker, you're more likely to die young, hence annuity providers are able and willing to offer you a higher income.)

So are these businesses finished, as the collapse in their share prices suggests?

They certainly face major challenges, no doubt about it.

They're in a market that will inevitably get a lot smaller – one analyst has suggested the UK annuity market will shrink by as much as 90%.

And you could argue that the poor health/lifestyle part of the market may contract by even more. After all, if someone is seriously ill, will they really want an annuity? Wouldn't they rather just spend some of their pension pot before they die and then pass the rest onto their family?

A second challenge is 'adverse selection'. Even though annuity rates are already very low, average rates across the market may fall even more thanks to Osborne's changes.

Why? Because the people who are most likely to buy an annuity in the future are those with a long life expectancy (or incorrigible optimists). So long-lived annuity buyers may no longer be subsidised by those who die soon after purchase, making it even harder to offer decent rates.

But the annuities market isn't going to die out altogether

That's the theory anyway.

However, even with these challenges, I'm pretty confident that Just Retirement and Partnership will still be able to win at least some new business.

Remember that all new retirees will now be offered free financial advice at the point of retirement. So that means all potential annuity buyers should be told about the best possible annuity deal for them (see my colleague Merryn Somerset Webb's blog for why this is important).

Granted, many retirees will balk at any suggestion of an annuity. But I think some folk will be persuaded. Only an annuity can provide you with guaranteed financial security until you die, which is not to be sniffed at.

Just look at the US. Annuities have never been compulsory across the pond, but, as Lex pointed out in the FT yesterday, annuities worth $220bn were sold in the US in 2012.

It's also worth noting that cancer patients often live for a lot longer than originally expected. If you can survive the first five years after you're diagnosed, you may go on and live for another 20 years. And, of course, many smokers or overweight folk still live into their 80s or 90s. Many advisers will make all of these points to new retirees.

Then there's the issue of gilt yields. Annuity rates are closely linked to long-term gilt yields. Currently gilt yields are extremely low. But they will inevitably rise sooner or later and when that happens, annuity rates should rise too, making them more attractive.

So I suspect that advisers will persuade some people with health/lifestyle issues that buying an annuity is still the best option. That will provide Partnership and Just Retirement with some new business.

These companies will also continue to make money from their existing annuity books – as long as they're able to invest the capital from their existing annuities shrewdly.

So both companies will still receive premiums from any new annuities they sell, and profit from their existing books. Just Retirement will also generate income from its equity release products.

Don't get me wrong – Osborne's move, while good for savers, is unequivocally bad news for the annuities industry. I accept that the annuity market will contract significantly. I just doubt that it will be by as much as 90%. And I think the poor health/lifestyle end of the market will survive too.

Which one should you take a punt on?

When you look at valuation, Partnership looks cheaper. It's on a historic price/earnings (p/e) ratio of five, while Just Retirement is on a p/e of 12.

I think there are two reasons for that differential. Just Retirement has a sizeable equity release business, and it's also less exposed to the 'impaired' annuity sector where you're selling annuities to people with serious conditions who may die within a year or two.

However, of the two, I'm most drawn to Partnership. On a p/e of five, I think it has the potential for a 'dead cat bounce' at the very least. And over the longer term, I think the company can still make money from annuities. So it could prove to be a decent, if risky, investment

[tsmith2] 21/3/2014 09:28

JRG. - we saw a bit yesterday and shares ended off 7%, here we were off 14%

[tsmith2] 21/3/2014 09:26

Need the directors to show confidence..

[shafaq] 21/3/2014 09:24

Rsi at 12,well oversold.Expect a good bounce from that position in the next few sessions.

[sos100] 21/3/2014 09:18

not much of a bounce so far compared to jrg..

[techno20] 21/3/2014 08:59

Hate to give him airplay, but for once agree with EK...

Shares in Partnership Assurance Group (PA.) were knocked sharply yesterday and have fallen again today to 126p thanks to the budget proposal to allow folks not to take an annuity when their pension is due – annuity provision is a major part of Partnership's business. Bear raider Evil Knievil reckons the market has got it wrong and has bought the shares.

Evil argues that the Net Asset value of partnership is – last seen – only slightly below the current share price and that this limits the downside.

He further argues that good parts of Partnership's business will not be affected by the proposed changes, something the company itself stated: "We believe that these proposals do not affect our range of Defined benefit, Care annuity and protection products."


Moreover he believes that although pensioners can now opt not to take an annuity many will decide to "play it safe" and still take an annuity. Thus the impact on partnership's profitability will not be as great as the share price reaction appears to indicate.

- See more at:

[techno20] 21/3/2014 08:34

Agree with the comments re. Nick Cazlet. Having seen him present a couple of times he's exceptionally bright.

Have joined the shareholder list this morning. Massive over-reaction IMO.

Techno

[hassani2] 21/3/2014 08:12

We should Finnish above 1.50

[123ct] 21/3/2014 08:08

If Nick Cazlet has a positive view I would listen to his view more than any analyst. IC came out with a buy recommendation this morning. Not convinced but opened a long on the spread bet this morning at 123p

[actybod] 21/3/2014 08:07

Some will take out enhanced but most will take lump sum.

[scrapheap] 21/3/2014 07:41

As I said on JRG thread, enhanced annuities are not dead - far from it - and that's my professional and personal view.

[tsmith2] 21/3/2014 07:24

Given they assume a very conservative 80% loss of business and still get a 152p share price, this is starting to look v attractive..

[tsmith2] 21/3/2014 06:40

EV measures the value of the insurer by adding today's value of the existing business (i.e. future profits) to the market value of net assets (i.e. accumulated past profits).It is a conservative measure of the insurer's value in the sense that it only considers future profits from existing policies and so ignores the possibility that the insurer may sell new policies in future. It also excludes goodwill. As a result the insurer is worth more than its EV.

[simon gordon] 20/3/2014 19:20

Heard on the Street in the WSJ - 19/3/14:

But even the likes of Partnership and Just Retirement may find crumbs of comfort. Both specialize in writing enhanced or impaired annuities. Previously the most rapidly growing segment of the market, such products offer higher income for those in ill health. Their customers have an average pension pot well above the national average of about GBP25,000 and are far more likely to have received professional advice when buying. Pots of more than GBP50,000 account for only 20% of the U.K. market by annuities purchased but about 60% of the value of new business, according to Deloitte.

Panmure Gordon notes that both stocks now trade close to or below their embedded value, implying no new business being written at all. Notwithstanding the turmoil to come in U.K. pensions, that seems a dire prognosis indeed.

[euclid5] 20/3/2014 19:20

Pensioners can buy the Gilts / Govt Bonds themselves & still get the fxd income & funds back on Mat dates - & when they pass away their spouse can get access to this after - but on enhanced Ann's the spouse does not get a payout upon her partner's death - so this is a huge negative for this type of industry

[knigel] 20/3/2014 19:17

It's about choice - some people will want the cash up front (or over several years) while others will want either a mixture of cash/income or a fixed income. The risk is that some will go on a spending craze and end up depending on the state pension as their only regular income. Health/life expectancy will also be factors. Hopefully the share price will not have much further to fall.

[simon gordon] 20/3/2014 19:16

Which is the better punt PA. or JRG?

PA. has an outstanding investigation from the FCA which might lead to a fine:

Sept. 2013:

After market close on 19 September Partnership Life Assurance Company Limited ("PLACL" or "the Company"), a wholly owned subsidiary of Partnership Assurance Group plc ("Partnership"), received notification from the Financial Conduct Authority ("FCA") that it has appointed investigators to conduct an investigation in relation to PLACL's distribution services agreement with one advisory firm. The investigation will seek to determine whether the Company has contravened the FCA's rules, including changes introduced by the Retail Distribution Review ("RDR"). The notification makes clear that "the appointment of investigators does not mean that the FCA has determined that rule breaches and/or other contraventions or offences have occurred". Given the recent press speculation, and receipt of notification from the FCA last night, Partnership considered it appropriate to make an announcement at this time.

----

JRG is clean.

Any views on a valuation basis as to which is better value as a punt?

[simon gordon] 20/3/2014 19:03

FT - 20/3/14:

Ned Cazalet, an independent consultant to the insurance industry, said the stock market reaction to the announcement – close to £3bn was wiped off the value of insurance company shares – was wildly off the mark.

Mr Cazalet cautioned shareholders: "Those [savings] assets are still there."

He expects UK insurers to venture into the most popular product among US retirees. "You will see a mass movement into variable annuities," he said. These can offer guarantees to protect income and capital and even provide a cash stream until the buyer dies.

The catch, he said, is that they might not be better value than UK annuities in their current form.

But the fact that there are alternatives in other markets suggests the UK industry will find ways to profit from the newfound flexibility.

[wylecoyote] 20/3/2014 18:44

123,That's the whole point. We are told that we are not saving enough. Apart from the likes of me and you who are already thinking about it. So those who have only £30k will just think sod it and blow the lot and absolve themselves of any responsibility. The income per week might be pitiful, but that was their own fault for not saving for retirement. Personally, I think it is a maneuver by the government to falsely raise tax revenues.... the biggest thing? If you don't have an annuity, you will have cash and\or assets that the government can raid to pay for your old healthcare costs....Any good advisors will suggest that you buy an annuity. ...still this is a waiting game to see what consumers actually do....

[123ct] 20/3/2014 18:23

a £25k pot would get £12.50 a week pension or closer to £9 if they had taken the 25% tax free cash, why bother? Not even a round of drinks.

The shock for people when they get to retirement and realize they have nothing makes the choice of buying an annuity an even less relevant decision,

£26k is widely quoted as being a typical fund, yet for people who have saved up for many this is still quite a commitment yet

[kristini2] 20/3/2014 18:01

I read that the average uk pension pot is only £26k, so £30k is a typical size fund

[hjs] 20/3/2014 17:34

Kristi

Where do you get the £30k figure from? Is this average for UK and published information?

[kristini2] 20/3/2014 16:24

the average annuity pot at retirement is possibly as little as £30k, so you need income certainty at retirement and you can annuitise for an assumed 6% return at age 65 (with enhancement, remember life expectancy may be reasonable with enhanced annuity)


many people will still annuitise rather than take cash sum, the return of 6% assumed is attractive, I guess inflation risk is always a worry longer term when taking a level annuity

[hjs] 20/3/2014 16:24

Again today I notice there are more buys than sells so I assume PA has been shorted and hence the price drop. Is this a reasonable assumption?