Strong GRE results put insurance sector in merger spotlight

Shares in the insurance sector received a double boost yesterday as merger-mania, on the back of the Commercial Union/General Accident deal, combined with the publication of strong financial results from Prudential and Guardian Royal Exchange.

A 41 per cent profits leap at GRE did little to dampen speculation that the smallest of the composite insurers needed to do a deal to catch up with its competitors. Pre-tax profits soared to pounds 872m, more than expected by most analysts. The company also announced it would return pounds 189m of capital to shareholders, approximately 20.5p per share.

One fund manager said: "Guardian is now the smallest company about. They are going to have to tie up or risk being left on the shelf". GRE is seen by many industry commentators as a prime takeover target. Shares in GRE finished the day up 34.25p at 475p.

Trevor May at Salomon Smith Barney said: "It's quite a respectable performance, although UK motoring results were worse than most people were looking for. I was quite pleased to see a return of capital to shareholders".

GRE has traded at a discount to the insurance sector for some time because of its relatively high exposure to the competitive motor insurance market.

Not everyone in the City shared the view that a merger was essential for the insurer. Mr May said: "It's an easy to thing to say but it's not as if the company is completely devoid of strategy. It's big enough to go it alone if it needs to."

Meanwhile, Prudential reported a sharp fall in profits from its UK life insurance business in 1997, a year which has seen it repeatedly pummelled by regulators over its failure to clear up mis-selling of pensions by its sales force.

Profits from long-term saving policies, including endowments, life insurance and pensions, fell by 9 per cent to pounds 570m. Much of the fall was due to a pounds 27m charge in respect of pounds 450m which has been put aside to compensate victims of mis-selling.

The Pru said new business profits - just 3 per cent up on 1996 at pounds 208m - had been hit by lower sales volumes from its sales force. The sales team were taken off the road for a month last summer after regulators raised serious objections to the Pru's compliance with the rules.

The UK results marred an otherwise upbeat year for the Pru which saw operating profits up by 15 per cent to pounds 895m. It announced a rise in dividend of 10.4 per cent to 19.1p per share. Its shares closed up 40p at 934p.

The Pru saw the amount of money it manages across the world grow by one- third to pounds 119bn as it integrated its biggest acquisition of last year, Scottish Amicable.

The Pru also made strides in the telebanking market, where policyholders put pounds 900m of fund into the company's new banking subsidiary. Last week, it announced it was opening a new call centre in Derby which will employ 1,500 new staff.