Improvement in life expectancy is slowing: good news for our L&G shares

From an insurer’s viewpoint, if death comes earlier than expected there’s a cause for cheer, says

FOR decades the assumption was that improvements in life expectancy were exponential and that this would continue more or less indefinitely. Credible scientists talked about the possibility of people already born, or soon to be born, living to 120, or even 150.

Yet in the last few years successive data suggest the rate of increase has ground to a halt. This is good news for life insurers and for Questor’s Income Portfolio.

Exposure to the sector comes via shares in Legal & General, purchased in January at 247p. Pre-tax profits rocketed 41pc in the first half of the year to £1.2bn, up from the £826m recorded in the same period in 2016, as reported in last week’s interims. That impressive performance includes a “base mortality release” of £126m – in other words, L&G has lowered its assumptions about how long its customers will live. Many of these will be pension savers in receipt of individual annuities, as well as those receiving income from “bulk annuities”, a rapidly growing part of the group’s business.

The latter deals see L&G assume the risk for meeting the “final salary” pension promises made by British companies in return for a premium. The firm entered into deals worth £1.5bn in the first half of 2017, up from £640m in 2016. Expansion into the American market is also progressing, with international transactions up from £45m to £115m.

Low government bond yields increase the strain on the companies supporting these pension schemes, meaning demand for the kinds of solutions L&G offers should remain high, particularly while interest rates are suppressed. Equity release contracts, or “lifetime mortgages”, are also an increasingly important revenue source. While the rate of longevity improvement may be slowing, we are still living longer. Increasingly that means parents are still in their homes when their children and grandchildren require financial help to get on (or move up) the property ladder. High property prices and falling interest rates – the average rate on an equity release plan is around 5.45pc – pushed the sector to a record-breaking year in 2016.

Despite new entrants, L&G has continued to grow its share of the market, now at 30pc. The bumper results have pushed shares up 8.4pc since our purchase, to 267.7p. Adding dividends of 4.2pc gives a total return of just under 13pc.

Update: Next

Another week and yet another analyst warns of Next’s inability to survive the onslaught from online-only retailers. As reported here earlier in the month, better-than-expected trading figures finally pushed the share price above the £40.89 we paid in January.

The 10pc rally was enough for broker Berenberg to recommend a “sell”. It warns Next is burdened by its 500-plus shops and dearth of investment in its online service. The analysis says the lack of free home deliveries exemplifies the business’s inability to adapt to changing shopping habits. Yet Questor believes the doom mongers are overly pessimistic. Next Directory, the firm’s catalogue business, is still a force to be reckoned with. Sales in 2016 were 4pc higher than 2015, at £1.7bn.

In addition, with three months of income still to come, the portfolio has received £477.75 in dividends, a 4.8pc yield. For now, Next remains a “hold”.

Watchlist: BB Biotech (BION)

Readers will be aware that the Income Portfolio – whose holdings are published in full on this page on the first Friday of each month – also maintains a “watch list” of prospective holdings.

This shadow portfolio comprises investments either too expensive to purchase now, or where income is not yet sufficient to help meet our ambitious 5pc target yield.

The watchlist contains just three shares – the recently launched PRS Reit (real estate investment trust); and two peer-to-peer investment firms, P2P Global Investments and Funding Circle’s SME Income fund.

Today we add yet another trust to the list in BB Biotech. Launched in 1993 and listed in Switzerland, Germany and Italy, it invests in biotech companies, mainly in the US.

Since 2013 it has operated a policy where it pays dividends (in Swiss francs) equal to 5pc of the average share price in December of that year. The share price, now around Sfr60 (£48), is up sixfold since 2011.