Rosy forecast for European insurers

EUROPEAN insurance shares are set to rise strongly on the back of rising premiums and recovering profits, claims a report by Paribas Capital Markets.

Despite the sharp increases in share prices seen in recent months, Paribas argues that investment prospects remain good because of the two years it takes for premium rises to feed through to results.

The upturn may be sustained by the later recovery of the huge US insurance industry, which could 'suck' competition out of other markets.

Recommended UK stocks are Commercial Union, for its quality management, and General Accident, for its high yield, solid balance sheet and exposure to improving markets.

Elsewhere, Paribas favours Axa and Assurances Generales de France, Allianz of Germany, RAS and SAI of Italy, Swiss Re and Mapfre of Spain.

In the UK, the heavy losses of the past three years and the damage done to insurers' finances are expected to deter a rapid return to fierce competition on premiums. Derek Elias, of Paribas, said companies could not afford to let their solvency margins halve again.

Sun Alliance is forecast to lose a further pounds 769m because of home repossessions over the next five years.

Mortgage guarantee claims could cost Royal Insurance a further pounds 615m and Eagle Star a further pounds 461m.

Paribas argues that insurers are almost alone in being able to impose substantial price rises during recession.