Investment Column: Insurance is where the action is to be found

It has been a lively old time for Britain's insurance industry in the last few months. Prudential was forced to scrap its blockbuster deal to buy the AIA Asian business in June. Clive Cowdery's Resolution buyout vehicle then followed last year's acquisition of Friends Provident with a £2.75bn deal for Axa's UK life business.

Aviva and RSA got into a slanging match this week after the former turned down its rival's £5bn offer for its non-life businesses. And yesterday saw Legal & General's shares jump on speculation about a bid from the Swiss giant Zurich.

This wave of activity reflects three things. First, Prudential's debacle notwithstanding, deals are do-able again as the financial crisis recedes and confidence returns to markets. Second, valuations remain relatively cheap having been battered in the meltdown. And third, companies are jockeying for position in a market in which size and scale play a huge part.

Andrew Moss promised "One Aviva Twice the Value" when he took over as chief executive in 2007, but the share price has roughly halved in that time. Investors have doubted the wisdom of Mr Moss's "composite model" – keeping life and general insurance under one roof – and the growth potential of his UK and European-focused business. But first-half profit beat expectations as Mr Moss's cost cuts bore fruit and new business sales surprised on the upside.

Legal & General's UK-centric business also produced better first-half results than expected. Oriel Securities analyst Marcus Barnard reckons the market seriously underestimates the growth potential of Aviva and Legal & General. What's more, both have made chunky £1bn-plus reserves against their corporate bond portfolios that could be released in the medium term.

Despite the bungled bid for AIA, which could yet see chairman Harvey McGrath or chief executive Tidjane Thiam lose his job, Prudential's valuation has held up well. Investors place a premium on the Pru's big Asian business, which generated forecast-beating profits in the first half of the year.

Lurking in the wings is Resolution – launched in 2008 to combine life insurance businesses in a market it says is "ex-growth" and over populated. The Axa deal gets Mr Cowdery almost halfway to his target of combining a number of life companies to form a £10bn operation by 2012 that would cut costs and generate higher returns for shareholders.

Aviva's life business, the Pru's UK operations or even Legal & General could be a target for Mr Cowdery. His presence may be keeping the UK-focused insurers on their toes and driving them to produce the operational improvements coming through in their results.

Along with most sector analysts, we rate Aviva as a buy. The company's 6.5 per cent dividend yield is chunky but not scary (a yield that is too high suggests the market believes the payout is at risk) compared with 4.4 per cent for both the Pru and L&G. Retail investors can sensibly take the dividend while hoping for a break-up or further performance improvements from pressurised management.

We rate the Pru and L&G as holds because of the former's rich valuation and the lower likelihood of the latter being involved in takeover activity.

Let's not forget that one of the catalysts for all this activity is RSA (formerly Royal & Sun Alliance). It got out of life insurance years ago and now combines its More Than retail business with corporate insurance.

Andy Haste, the chief executive, has done a great job in turning round the mess left to him in 2003 and he would no doubt wring plenty of savings out of Aviva's assets. But with RSA willing to enter talks with Aviva that could lead to a higher offer, we are cautious about the shares.

There may be more corporate action in life insurance, but we think parts of the hugely varied non-life sector offer good prospects, too. Margins in the general household and motor sector have rebounded after companies increased their prices to counter greater levels of fraud and payouts heightened by ambulance-chasing lawyers. But corporate insurers are languishing at the bottom of the cycle waiting for a catalyst to spur price increases.

Along with Numis Securities, we like Hiscox, which combines catastrophe underwriting – whose margins have stayed beefy post-Hurricane Katrina – with upmarket personal insurance covering niche such as kidnap and fine art. We like this balance of businesses and their resilience against the frantic competition in other parts of the non-life sector.

Our top picks are therefore the unsteady giant Aviva and the nimble niche player Hiscox.

In 2006, Pluto was reclassified as a 'dwarf planet'
scienceBut will it be reinstated?
Jennifer Lawrence at the Vanity Fair Academy Awards party in February 2014
people12 undisclosed female victims are seeking $100m in damages
Arts and Entertainment
Adam Levine plays a butcher who obsessively stalks a woman in Maroon 5's 'Animals' music video
music'Animals' video 'promotes sexual violence against women'
people Biographer says cinema’s enduring sex symbol led a secret troubled life
voicesI like surprises - that's why I'm bringing them back to politics, writes Nigel Farage
Bear and hare woodland scene from John Lewis Christmas advert
newsRetailer breaks with tradition, selling real festive fir trees online for the first time
Arts and Entertainment
Anthony Horowitz will write the next 007 novel
booksAnthony Horowitz to write new instalment in spy series for 2015
British actor Idris Elba is also a DJ and rapper who played Ibiza last summer

Kirstie Allsopp has waded into the female fertility debate again

Kicking on: Nathaniel Clyne is relishing the challenge of the Premier League after moving from Crystal Palace
footballSurprises include a first ever call-up for one Southampton star
ebooksAn unforgettable anthology of contemporary reportage
4 May 2013: The sun rises over Tower Bridge in London. Temperatures across the UK could be higher than several European holiday destinations by Monday, including parts of Italy and France (Andy Hepburn/PA)
The moon observed in visible light, topography and the GRAIL gravity gradients

...and it wasn't caused by an asteroid crash, as first thought

Researchers say a diet of fatty foods could impede smell abilities
scienceMeasuring the sense may predict a person's lifespan
newsGlobal index has ranked the quality of life for OAPs - but the UK didn't even make it into the top 10
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Trust Accountant - Kent

NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

£18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

Law Costs

Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

Day In a Page

Italian couples fake UK divorce scam on an ‘industrial scale’

Welcome to Maidenhead, the divorce capital of... Italy

A look at the the legal tourists who exploited our liberal dissolution rules
Tom and Jerry cartoons now carry a 'racial prejudice' warning on Amazon

Tom and Jerry cartoons now carry a 'racial prejudice' warning on Amazon

The vintage series has often been criticised for racial stereotyping
An app for the amorous: Could Good2Go end disputes about sexual consent - without being a passion-killer?

An app for the amorous

Could Good2Go end disputes about sexual consent - without being a passion-killer?
Llansanffraid is now Llansantffraid. Welsh town changes its name, but can you spot the difference?

Llansanffraid is now Llansantffraid

Welsh town changes its name, but can you spot the difference?
Charlotte Riley: At the peak of her powers

Charlotte Riley: At the peak of her powers

After a few early missteps with Chekhov, her acting career has taken her to Hollywood. Next up is a role in the BBC’s gangster drama ‘Peaky Blinders’
She's having a laugh: Britain's female comedians have never had it so good

She's having a laugh

Britain's female comedians have never had it so good, says stand-up Natalie Haynes
Sistine Chapel to ‘sing’ with new LED lights designed to bring Michelangelo’s masterpiece out of the shadows

Let there be light

Sistine Chapel to ‘sing’ with new LEDs designed to bring Michelangelo’s masterpiece out of the shadows
Great British Bake Off, semi-final, review: Richard remains the baker to beat

Tensions rise in Bake Off's pastry week

Richard remains the baker to beat as Chetna begins to flake
Paris Fashion Week, spring/summer 2015: Time travel fashion at Louis Vuitton in Paris

A look to the future

It's time travel fashion at Louis Vuitton in Paris
The 10 best bedspreads

The 10 best bedspreads

Before you up the tog count on your duvet, add an extra layer and a room-changing piece to your bed this autumn
Arsenal vs Galatasaray: Five things we learnt from the Emirates

Arsenal vs Galatasaray

Five things we learnt from the Gunners' Champions League victory at the Emirates
Stuart Lancaster’s long-term deal makes sense – a rarity for a decision taken by the RFU

Lancaster’s long-term deal makes sense – a rarity for a decision taken by the RFU

This deal gives England a head-start to prepare for 2019 World Cup, says Chris Hewett
Ebola outbreak: The children orphaned by the virus – then rejected by surviving relatives over fear of infection

The children orphaned by Ebola...

... then rejected by surviving relatives over fear of infection
Pride: Are censors pandering to homophobia?

Are censors pandering to homophobia?

US film censors have ruled 'Pride' unfit for under-16s, though it contains no sex or violence
The magic of roundabouts

Lords of the rings

Just who are the Roundabout Appreciation Society?