Some areas worth a look

Apr 2 2008 by Andrew Miller, The Journal

RECENT turmoil in the financials sector has left many investors understandably wary of banking shares, although we would argue that these are now keenly priced.

But buried under all the banking headlines, one may tend to forget that there are other parts of the financial sector that are well worth a look – particularly for those investors who are willing to see through to the other side of the current market volatility.

Insurance is a case in point, although drawing general conclusions about the sector is difficult. There are many different sorts of insurance to fulfil different needs, and insurance firms have differing focuses.

So, as with most FTSE sectors, there are some leaders, some laggards and some stocks that occupy the middle ground.

In the UK life insurance sector, we have for some time been more enthusiastic about larger firms. This bias has continued to serve us well, with both Prudential and Aviva outperforming the sector as a whole in the first quarter of 2008.

Some of this outperformance has been due to good performance in non-UK markets.

Aviva is still delivering strong returns in the global life insurance business and we continue to like its composite business model.

Interestingly, our positive view is at odds with the recent share price valuation, with Aviva continuing to trade on an undemanding rating.

For Prudential, although the UK division remains unexciting, the Asian growth story goes from strength to strength. Another plus for the Pru is that its Asian franchise provides a credible source of long-term growth that is independent of economic trends in the UK – no bad thing if the UK economy does slow appreciably this year.

We think investors will view the Pru as a cheap way to play the Asian markets, rather than as a premium way of investing in the UK insurance.

The more UK-focused, lower-margin businesses have seen mixed fortunes. Although Standard Life posted strong results, we continue to prefer its larger peers. Meanwhile, Friends Provident is effectively in break-up, although current market conditions may preclude a takeover.

In the UK non-life insurance sector, our focus on motor insurer Admiral might appear less fortunate.

Admiral’s share price has fallen sharply as the expected turn in the UK motor underwriting cycle appears to have been postponed once more. But fundamentally, little has changed: Admiral has a simple but strong business model and manages its costs very well.

Andrew Miller is regional office head of Barclays Wealth.