UK insurers tipped for robust first-half earnings

LONDON Mon Aug 5, 2013 11:06am EDT

The sun reflects in a window above the raised lettering of the former Prudential Assurance building in the City of London May 28, 2010. REUTERS/Luke MacGregor

The sun reflects in a window above the raised lettering of the former Prudential Assurance building in the City of London May 28, 2010.

Credit: Reuters/Luke MacGregor

LONDON (Reuters) - For Britain's insurance industry, things are looking up.

Investors expect buoyant investment returns, a shake-up of UK company pensions and well-performing overseas arms to lift earnings for life and savings-focused UK insurers, which start reporting first-half results this week.

Followers of the sector see such a list of positive trends creating a particularly positive backdrop.

Analysts at Credit Suisse said Britain's blue-chip insurers are "in a sweet spot with rising flows (of new money), and strong asset markets driving year-on-year gains in assets under management and therefore revenue growth."

They also highlight insurers with large international operations, such as Prudential (PRU.L) and Aviva (AV.L), which should benefit from a weak British currency, enhancing the value of foreign revenues.

Shares have already enjoyed the benefit and the FTSE insurance sector .FTUB8500 recently hit a multi-year high, having outpaced the blue-chip FTSE 100 .FTSE by 12 percent over the past six months.

And it's not just UK companies who are on a roll. Europe's two top insurers, Allianz (ALVG.DE) and AXA (AXAF.PA), last week reported forecast-beating earnings, helped by strength in asset management and their property and casualty businesses.

One chief executive of a leading British insurer, speaking on condition of anonymity, said his and other companies are already starting to enjoy a boost to flows of new money from a system of automatic enrolment of employees into company pensions.

The UK government, seeking to lessen the burden on the state of an ageing population with more people retiring every year, has shaken up the pensions system to encourage more saving.

Reforms introduced late last year stopped short of emulating Australia, which has a compulsory private pension system, but ensured all employees are automatically signed up to schemes and have to opt out if they do not want to participate.

LONG-TERM BUSINESSES

Insurers are likely to benefit because many, such as Edinburgh-based Standard Life (SL.L) which releases earnings on Thursday, or Legal & General (L&G) (LGEN.L), which reports on Tuesday, run long-term savings businesses.

Investors will also be looking out for updates from L&G on further expansion plans following a series of modest bolt-on acquisitions this year, such as buying a 46.5 percent stake in housebuilder Cala Group from Lloyds Banking Group (LLOY.L).

An investment in housing reflects a growing trend among insurers to invest in infrastructure assets and management may use first-half earnings to spell out further plans in this area.

Infrastructure is seen as attractive by insurers as potential sources of relatively low-risk, inflation-linked returns from revenue streams such as road tolls or rents that can underpin annuity products.

Meanwhile, Prudential is favored for its exposure to Asia, where high savings rates and a growing middle class make it fertile ground for insurers, and North America, where interest rates are rising and likely to boost margins.

"We forecast (Prudential's) operating earnings to grow by 13 percent year-on-year. We expect strong earnings out of Asia and improving earnings out of the U.S." said Bernstein Research analysts in a note.

One Prudential shareholder who is head of equities at a UK fund manager said: "With the Pru, we're hoping for good things."

Another company investors will watch closely is Aviva (AV.L), which reports on Thursday, seven months into the tenure of new boss Mark Wilson, formerly chief executive of AIA Group Ltd (1299.HK), who was brought in to turn the firm around.

Wilson joined after spiraling costs and poor share price performance triggered an investor revolt in 2012 that forced out then-CEO Andrew Moss.

A root and branch shake-up at Aviva has involved disposals of non-core assets and analysts therefore expect operating earnings will be lower year on year.

Extreme weather and floods in Alberta in June are seen putting costs on its Canadian arm. But many are impressed with Wilson's record so far.

"Aviva might just be one we can be dragged kicking and screaming back to have a look at," the UK head of equities said.

(Editing by David Holmes)

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