Each week, a professional investor tells MoneyWeek where he'd put his money now. This week: Alex Imrie, UK Equities, Kleinwort Benson.
As the chancellor delivered his Budget speech peppered with important changes to savings and pensions investors were left to consider the consequences for the insurance industry. Despite the government's changes, we believe that certain life and non-life insurers stand to profit disproportionately from continued economic recovery.
As well as benefiting from the higher level of savings that usually accompanies an improving economy, life insurers also benefit from a gentle steepening of yield curves. If this happens, it will leave the asset side of the insurers' balance sheets relatively unscathed, but reduce the present value of their liabilities.
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As a whole, the UK insurance market has been under strain from both the Budget and regulatory announcements. But our preferred stocks both UK-listed or otherwise have limited exposure to those risks.
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Prudential (LSE: PRU) has been a favourite of ours for some time. It has enviable geographic exposure to Asia, the US and the UK, and so can pursue profitable growth opportunities in some of the world's fastest-growing regions.
Its regional operations are all returning significant cash to the parent company, supporting a dividend that has grown at a minimum rate of 5% a year since 2005.The dividend is also often reset' upwardswhen management is comfortable with the company's balance sheet.
One winner from the 2014 Budget changes could be Standard Life (LSE: SL). As a leading long-term savings and investments company, Standard Life is set to benefit from further growth in the pension drawdown and individual savings accounts (Isa) markets.The company's corporate offering also seems well placed to build assets, given the relatively new pension auto-enrolment regulations.
In the non-life insurance sector, we like Lloyd's insurer Beazley (LSE: BEZ). The sector typically benefits from growing economic activity, as rising consumer demand drives growth in personal property and casualty insurance lines, and businesses need to mitigate risk, thereby boosting premiums in commercial lines. Beazley is particularly attractive as it is less exposed to the tail-risks of catastrophe insurance.
Much of Beazley's business lies in insuring professionals against losses arising from errors in judgement or negligence. These are niche areas requiring specialist skill, which allows Beazley to maintain strong pricing and profit margins.
Within continental Europe, we favour AXA (Paris: CS). While it is a higher beta name (ie, it's more volatile), it has attractive free cash flows and its balance sheet is improving.
For the time being, AXA is heavily reliant on a volatile life and savings business segment, but we support the management team in its efforts to grow more stable business lines. We are optimistic on the overall outlook for European stock markets, and AXA remains cheaper than its peers, so we think it offers an attractive risk-reward balance.
In the US, Towers Watson (NYSE: TW) is a high-quality insurance franchise with good growth prospects. Its exposure to private healthcare exchanges driven by Obamacare' should lead to solid growth over several years. Its ability to deliver cost efficiencies should help it to maintain margins and profits.
