British insurers reporting strong profit gains in wake of Brexit vote

Standard Life and Legal & General have joined Aviva in reporting bigger increases in profit than the market was expecting. That’s good news for a sector that tumbled in the wake of the Brexit vote. Prudential is next up and is expected to report flat profits, but could join peers in raising dividend payouts.

Standard Life has reported a 7% increase in assets under management and an 18% rise in operating profit for the first-half of the year thanks to market gains since Britain voted to the leave the European Union. Legal & General reported a 10% increase in operating profits for the same period thanks to growth in annuity sales.

That’s further good news for a sector that was hit hard in the immediate aftermath of the Brexit vote, with share prices tumbling on expectations that the fallout in the broader economy would hurt the firms. Equity markets have since recovered, as the Bank of England moved fast to shore up confidence and the UK’s ruling Conservative party also moved quickly to appoint a new leader and prime minister in Theresa May. Insurance company shares have also recovered somewhat, although they remain well below where they were prior to the referendum. 

Brexit is a mixed picture for the British insurers, many of which have large overseas operations that will be boosted by the pound’s fall. Even in the UK, the insurers say they are largely immune to the Bank of England’s interest rate cut to a new historical low of 0.25% and Legal & General says the hit to UK pension funds from Brexit may not be as bad as some had feared. This is good news for this company given its big push into the bulk annuity market for company pension funds.

The latest insurance earnings season was kicked off by Aviva, which also reported a jump in profits as good growth in its life insurance division more than offset a rise in natural disaster claims.

'We are growing in the UK, we are investing in the UK. We like the UK,' Chief Executive Mark Wilson said in the wake of those results.

It’s not all about results for investors. The insurers have also been increasing dividend payouts.

Aviva hiked its interim dividend by 10%, Legal & General introduced a new formula that meant its interim dividend rose by 16% and Standard Life increased its dividend by 7.5%. They are amongst the best dividend-yielding stocks in the FTSE 100, an important factor for investors hunting income when yields from many asset classes are so low.

This should prove supportive for their share prices, although it’s worth noting the reaction of Standard Life and Legal & General shares in the immediate aftermath of releasing first-half results. Although both sets of results were positive at first glance, Standard Life shares were among the best-performing stocks in the FTSE 100 on the day while Legal & General shares were among the worst. That’s because Legal & General is perhaps more exposed to a likely downturn in the UK economy in coming months.

'There are many different views of the outlook for economic growth, the state of financial markets and political uncertainty,' its Chief Executive Nigel Wilson said in a cautious outlook. 'While we cannot be immune to this uncertainty, we remain confident that we will continue to deliver attractive returns for shareholders'.

Larger, more diversified insurance groups are seen as better placed in this environment, and Standard Life’s recent diversification certainly appears to be paying off given the increase in its profits.

Since September 2009, the combined Life Insurance index for the FTSE 350 has returned 59% in absolute terms (7.1% annualised), but with dividends reinvested that figure surges to 98%, or an annual return of 10.7%. The sector has broadly retraced since its peak in 2015, but even with the fall in share prices it continues to look compelling, with the income picture now supplemented with more attractive valuations; the sector as a whole currently trades at 16 times earnings, versus around 20 times in the first-quarter of 2015. 

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