Financials fund managers are starting to nibble away at troubled life insurance stocks, tempted by p...
Financials fund managers are starting to nibble away at troubled life insurance stocks, tempted by potentially great long-term value.
Standard Life's decision to cut payouts to 2.3 million pension savers by 15% is one of several recent negatives that have had the bears out in the life insurance sector, particularly in the UK.
However, David Jane, fund manager for the M&G Global Financials fund, says people seem to have forgotten that 'ultimately life insurance is a growth industry'.
He says: 'Unless you take the view that governments will provide for people's retirement, and I just do not see that as credible, these companies are still very well positioned for long-term growth.
'It is just a matter of getting out of this short-term capital squeeze. But nobody is thinking of life insurers as a growth sector right now, which is why I have been buying them, cautiously and gradually.'
Funds that can spot and buy the life insurers, which should emerge stronger and fitter from the dip in economic growth, will be handsomely rewarded in the long term, says Jane.
He adds that overall, his financials fund is cautiously moving to being less underweight both life and general insurance. Most counterparts, he feels, are probably moving towards neutral as they own a lot of AIG, an equity in which he is not invested.
David McCraw, Edinburgh Global Financials fund manager, notes it is difficult to estimate the impact of the recent FSA relaxation of the rules on life insurers' equity exposure.
European Union rules say a life insurer's free asset ratio must be at the level at which its assets are at least 4% higher than its future liabilities. Stock market falls have caused life firms to rapidly shed equities to meet the ratio, prompting the FSA to act.
The FSA says its action is in advance of move to reform and add transparency to insurers' with-profits fund solvency requirements.
McCraw says the value of the FSA action is hard to gauge as the life insurers' true exposure to equities is an unknown.
In a stock market rally, he adds, there might also be further selling pressures on the firms in order to take quick profits, which will reduce their exposure further. But his gut feeling is that their exposure is probably lower than widely thought as they have been selling equities for at least a year.
Standard Life's announcement of exit penalties and bonus cuts for with-profits customers has put a drag on the life sector. McCraw adds: 'To what extent can the life insurers continue to offer competitive products, particularly now the with-profits fund type product is not likely to have much success garnering new business?'
Life firms are also still frustrated by tight restrictions such as the 1% cap on costs on stakeholder pension products. He says: 'One big company said it could be 10-15 years before it starts making any money on stakeholder pensions.
'But the longer-term argument is indeed that the pool of private savings potentially has to continue to expand.
'That has to be good for those able to provide products on a cost-effective, profitable basis.'
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