Commercial Union plays safe by spreading its business

INVESTMENT COLUMN
A good set of figures from Commercial Union confirmed its place at the top of the composite insurance pile. It has a better life business than its peers, a wider geographic spread and so a lesser exposure to the UK where falling premium rates in general insurance will inevitably lead to declining profits.

In the year to December CU's total premium income increased from pounds 6.76bn to pounds 8.65bn, mainly thanks to the inclusion of 1994's big Groupe Victoire purchase, which is increasingly looking to have been a shrewd buy. Underlying operating profits grew 14 per cent to pounds 509m, well above market expectations, which allowed a 7 per cent increase in the full-year dividend to 28.25p.

Heavily skewed to life assurance, the French company's inclusion pushed life premiums to 43 per cent of the total and boosted profits from that source by pounds 87m to pounds 244m. That matters because with the insurance cycle in the UK about to embark on a downswing, diversity of income sources will be crucial.

The integration of Abeille Vie, Groupe Victoire's life operation, boosted French life profits from pounds 21m in 1994 to an impressive pounds 66m last year. Recovery in the Netherlands, where profits improved from pounds 84m to pounds 118m, was the other key driver of the division's better performance, despite the continuing reluctance of consumers in many territories to take on long term savings plans.

In general insurance, the downturn in profits emerged in the dominant UK result, where profits slipped from pounds 250m to pounds 229m as competition bit and subsidence and weather-related claims took their toll.

For the division as a whole, profits moved ahead pounds 97m to pounds 474m with useful growth in investment income and a cushion from overseas results which now account for almost 70 per cent of general premiums.

What pleased the City most, however, was the 30 per cent improvement in shareholders funds from pounds 3.14bn to pounds 4.07bn. It may not be the best measure of the value of an insurance company but it is the most commonly used and CU was in need of a sizeable uplift to support a share price that, in line with the rest of the sector, had enjoyed a buoyant 1995.

Even so, a modest premium to net assets after yesterday's 16p rise to 614p, makes the shares look relatively pricey compared to some of its peers which generally trade at a discount to underlying value. That is reasonable given CU's quality and with the support of a 5.8 per cent yield, but don't expect any fireworks.

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