Newspaper article The Evening Standard (London, England)

Insurance Firms Are Not So Dumb

Newspaper article The Evening Standard (London, England)

Insurance Firms Are Not So Dumb

Article excerpt

Byline: Anthony Hilton

IT'S been a good three months for the insurance sector as investors have finally come to understand they are not banks and that this is a good thing.

Before the crash, of course, investors thought it was a bad thing because banks appeared to make much more money than insurance companies with a lot less capital.

It took the crash to get them to understand that bank returns were a result of them being geared up to the point of insanity and that their profits resulted from taking inordinate amounts of risk. They came to realise that insurance companies were not so dumb after all.

The surge in share prices this year shows the insurance sector is being rehabilitated and with good reason. While HSBC, the most resilient British bank, struggled to make a 10% return on capital in its latest results and has cut its long-term target return to the range of 12% to 15%, Legal & General, which reported this morning, boasts a return on equity of 18.2%. In fact on this yardstick -- which is supposed to be the key investment measure -- all the insurance companies did better than any of the banks Though one is never really comparing like with like, Legal & General probably also shows the biggest uplift, thanks at least in part to the vigorous action taken during the crisis to focus the group on the most profitable lines of growth, modernise the product range and squeeze out cash. The results are now coming through strongly, and while all the big companies have increased their dividends, L&G has managed a 24% hike. Its cash generation at [pounds sterling]728 million is significantly above its [pounds sterling]600 million target and its worldwide sales are up 28%.

The other way investor sentiment has changed is in realising that though it is a mature industry, the UK-based life sector still has opportunities for growth. The shrinking of the welfare state in this country may appear at first sight to be a dislocating change, but it could be an improvement as the insurance industry steps in and takes on much of the role.

In areas like sick pay, for example, the evidence suggests that the private sector will do the job better -- giving closer personal attention and treatment to those who are ill so they can get back to work earlier. …

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