Standard Life has got off to a decent start as a listed company even though some customers have been cashing in policies after the float.
Shortly before Standard Life
(LSE: SL)
floated in July, I wrote that the company was "priced to go", and, sure enough, the share has moved up nicely from the float price of 230p to 268p today. I think the shares are worth holding.
Admittedly, the share has slipped on today's interim results. The market is worried by news that a higher than expected number of customers are cashing in their policies now they've received their share allocation in the float. Some other customers are ending pensions in order to exploit the new pension rules following A-Day. The company has increased "lapse" provisions by £100m in response.
What's more, first-half profits missed analyst forecasts, partly thanks to the increased provision. Operating profits came in at £206m, lower than a consensus forecast of £249m. Still, the trend is up; operating profit for the full year in 2005 was £395m.
And there was good news in today's results statement. Standard Life's "share of the UK life and pensions market rose in the first half and profits improved."
New business contributed a profit of £93m, almost three times greater than the equivalent figure for the whole of 2005. That's thanks to a concentration on higher margin products such as SIPPS and investment bonds.
SIPPS and the changes following pensions A-Day mean there's decent potential for growth in the UK life business. And even the more problematic Canadian operations seem to be picking up. True, overall market share in Canada has fallen but profits are rising thanks to improved margins and a decision not to chase volume via low prices.
Valuation
Life insurance companies are often valued on an "embedded value" (EEV) basis -- a combination of adjusted net asset value and the present value of future profits.
Traditionally, if a life insurance company trades on a multiple of one times EEV, it's seen as cheap. Prudential
(LSE: PRU)
, for example, currently trades on a multiple of 1.4. At flotation, Standard Life's EEV multiple was just below 1. Today's new EEV per share figure is 246p, so at 268p, Standard Life trades on an EEV multiple of around 1.1.
Looking at the price/earnings ratio, analysts were forecasting earnings per share of 20.3p for the whole of 2006. That puts the company on a price/earnings ratio of 13, but I expect that analysts are probably cutting their full year forecasts today so the p/e ratio may rise a little.
Standard Life's relatively low EEV multiple reflects the fact that the company has its problems: departing customers after the IPO, a troubled healthcare business, declining market share in Canada, and uncertainty about future top management. But overall, I certainly don't think Standard Life is expensive, more like around fair value.
So if you hold shares from the IPO, I suggest you hang on. That's especially true if you're in line to receive a 5% top-up by holding until next summer.
I'm not sure that now is a good time to buy fresh shares, but if the share price slipped back to 246p, then Standard Life could be an attractive play on an ageing population's need to invest more for longer retirements.
