Broker snap: Investec reviews insurance sector after Retail Distribution Review

7th Jan 2013 10:56

Investec has labelled St James's Place and Standard Life as its top 'buys' as part of its review the insurance sector.Meanwhile, it has upgraded its rating for Legal & General (L&G) from 'sell' to 'hold' and downgraded RSA from 'hold' to 'sell'."The outlook in the UK is clouded by the introduction of Retail Distribution Review (RDR), economic torpor and the poor investment returns that are the inevitable by-product," said analyst Kevin Ryan on Monday morning.The RDR, released on December 31st 2012, seems likely to dramatically alter the UK life insurance landscape, he said."The ending of life companies paying commission to IFAs and other sales people should help to lower new business churn and improve margins. Adjusting business models to cope with this may not be easy."However, Investec believes that the two companies best positioned are St James's Place and Standard Life, both rated 'buy'. STJ uniquely has an internal sales force, the broker noted, while Standard Life ceased paying commission when it came to the market in 2006.As for L&G, while Ryan believes that it is still facing "strategic challenges", cash generation is now good. "We believe it is encouraging that the cash the company declares is originating from annuities is reducing in percentage terms, as this reflects better margins emerging in other products. This progress gives us the confidence to move our 'sell' recommendation to 'hold'."The RSA downgrade reflects the broker's view that the shares are overvalued, trading at 1.6 times forecast tangible book value."We think this is too expensive for a business facing a challenging operating background (weak rates in most business lines in most geographies and low investment returns). In addition, the dividend is under pressure, we believe."Elsewhere, Investec recommends to 'buy' Aviva, switching from Prudential ('hold') which is fully valued.BC