Legal & General has been the talk of the City. Bid rumours have been seen as the driving force behind the life assurer’s 7.9 per cent share price gain.
But beneath the chatter, L&G has just been keeping pace with some of its peers. Aviva and Standard Life have also seen sharp moves, with the former up 8.1 per cent this week and the latter up 3.9 per cent.
The sector as a whole has undergone an image change in the eyes of investors as equity and credit markets have recovered.
Some institutions believe that the sector’s rally has gone too far. Goldman Sachs analysts removed L&G from their “conviction buy” list this week, suggesting they do not believe bid rumours that have named potential suitors as diverse as Italy’s Generali, Australia’s NAB and AMP and Resolution of the UK.
The latter, Clive Cowdery’s consolidation vehicle, is seen as the most probable bidder, but not until it has closed its acquisition of Friends Provident at the end of this month.
Lansdowne Partners, the hedge fund that focuses on financials, appears to have called the top in Prudential’s rally after it revealed on Friday it had a small net short position in the stock. Pru has led the sector with a consistent rise since the lows of mid-July, but has dropped 5 per cent in the past two days.
To many analysts, the recent strength of life assurers is of little surprise. They are stocks that exhibit very high “beta”, which means their movements exaggerate those of the broader market. There is also a belief that, unlike Lansdowne, many investors have been closing out their short positions.
“The FTSE 100 just closed the quarter with its best quarterly performance ever,” says Paul Lloyd, an analyst at Credit Suisse. “Combining the life stocks’ high beta, a squeeze on shorts and the M&A speculation, their performance is no surprise.”
The FTSE rose 21 per cent between the end of June and the end of September. But potentially more important for the big annuity writers, such as Prudential, Aviva and L&G, is the recovery in credit markets. These companies invest heavily in corporate bonds and have big exposures to riskier financial debt.
To illustrate the recovery, the cost of protecting risky financial bonds against default has more than halved in the past six months, dropping from the equivalent of more than £350,000 annually per £10m of debt on a five-year contract to about £130,000 now.
Barrie Cornes, an analyst at Panmure Gordon, says the recovery in bond and stock markets has allowed investors to stop worrying about whether life assurers might be bust and to begin looking again at valuations on a more forward-looking basis.
“Despite their recent strong run, we believe there is still more upside in the share prices of UK life insurers,” he says.
He says Resolution will not be alone in sniffing out acquisitions. “We suspect that any resulting proceeds [from Aviva’s expected sale of a stake in DeltaLloyd] could be used to compete with Resolution for UK life and asset management operations rather than simply being used to restructure the balance sheet.”
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