Fans appear for life sector

The Investment Column
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The life insurance industry has had a torrid time of it recently. Sales of life and pensions products have been tumbling as a result of the bad publicity engendered by the "mis-selling" debacle and the continuing feel-bad factor has put off potential purchasers.

It is hardly surprising, therefore, that a shrewd financial operator like Donald Gordon, who built Liberty Life into South Africa's largest quoted insurance group, should have chosen now to sell out of Sun Life, one of the UK's biggest life insurance operators.

His decision seemed to chime in with gloomy news from Prudential, which dominates the UK market and reported that sales of regular premium products like personal equity plans and life policies had fallen for the second half-year in a row.

Some believe that these figures will get worse still, as the industry faces a triple squeeze from declining sales, higher costs due to increased regulation and the resulting enforced push into lower-margin products like traditional "drop down dead" life insurance cover. The stock market, by contrast, appears to take a rosier view, as the sector's 6 per cent outperformance against the All Share index since the turn of the year shows. There are several reasons. The most obvious relates to the stock market's own 10 per cent rise this year, which has boosted insurance companies' heavyweight investment portfolios.

Takeover hopes have also continued to swirl around the sector, which the Sun Life deal can only add to. TransAtlantic, Mr Gordon's UK vehicle, has made no secret of its desire to get back into the business either here or in the US. The cash from the sale and committed bank lines will give it a war chest topping pounds 700m, although there may be easier targets than a quoted acquisition.

But perhaps the most persuasive factor in the recent strength in the life sector is the feeling that most of the bad news is now out of the way. The new regulatory system is in place, while the Government continues to pare away at the state welfare and pension systems, giving an increased incentive for people to look to private provision.

That should help bring the old-fashioned door-to-door operations of the likes of Refuge, on a forward yield of 4.2 per cent with the shares at 389p, and Britannic, 3.2 per cent at 603p, back into fashion. They could see dividend growth of around 20 per cent a year if they choose to follow United Friendly and give shareholders a bigger share in the life fund surplus. But that is already reflected in the share price. By contrast the Pru, yielding a prospective 5.8 per cent at 332p yesterday, looks a better way into the sector.

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