Hello. Welcome to Company Focus. My name is Aamer Nawid. I'm an Analyst at Fat Prophets and today we're going to be taking a look at the UK life insurance sector, most notably Prudential, Aviva, Legal and General and Standard Life.

Now one of the most significant news flows to hit the equity markets, or to impact the equity markets, in March has been Prudential's $35bn purchase of AIG's Asian Life Insurance business AIA. Regular viewers will be aware I'm all in favour of companies looking to ramp up exposure to Asia and the takeover will see Prudential accrue 90 per cent of their net business profits from the region.

Looking at how Prudential's shares have performed recently, you wouldn't think the company is about to inherit 20m new customers from the Asian region. From where I sit, the life insurers are at a bit of a crossroads right now. Sure, economic recovery certainly bodes well for sector earnings, however, recovery is far from assured.

Life insurance is a bit like general insurance, it's far from defensive. If you look at general insurance, for example, if we're buying less cars, if we're buying less property, we're less likely to purchase car insurance or payment protection insurance. If I lose my job, or forced to take a pay cut, thoughts about contributing to a life insurance policy, or maybe taking out an investment of savings products sort of drifts to the back burner. This is basically what has happened in 2008 across the sector.

After having a bunch of highly skilled actuaries work out the premiums to actually charge us for our life insurance, these companies, what they do is they basically put our money to work in the financial markets.

Now here lies another problem. Tough economic conditions have led to poor investment returns which have led to a change in assumptions as to how much these investment pools will be worth at some point in the future, although interest rate environment is not great for bond dominated portfolios, which typically life insurance companies basically have and a change in these assumptions has led to charges being put onto profits and impacting and weighing down earnings, particularly in 2008.

Okay, if you look at Prudential over the sort of recent days, weeks, share performance hasn't been great. However, over the long-term the shares have actually outpaced the broader market. The company has had a tough 2007 and posted a pre-tax loss of GBP450m in 2008.

However, this was more due to tough prevailing economic conditions and investment portfolio conditions rather than problems actually shifting policies. In 2008 the company actually posted a 12 per cent increase in operating profits, which kind of gauges this area of the market. This came in at GBP1.3bn and then this moved to GBP1.4bn in 2009. So kind of operational strength there and it kind of underscores why the dividend has increased by 5 per cent recently announced.

Legal & General have also performed pretty well. Results are out next week, so the chart may look slightly different. However, up until now investors have sort of focused on a good solid sort of opening six months to 2009 as well as good sort of progress with regards cost reductions in the final quarter of 2009, as well as some progress in emerging markets such as India and the Middle East.

Elsewhere, Aviva and Standard Life have both also sort of not performed as well as Prudential. Focusing on Aviva, I think as you can see from the chart, share price has lagged behind Prudential's quite significantly - share price performance has.

Unlike Prudential, the company hasn't sort of pushed ahead with strong operating profit growth. Like Legal & General, they've actually recently announced a dividend cut which obviously has weighed down on sentiment there. Although the company did manage to turn around a loss of 2008 into a profit in 2009, this was rather to do with operational strength. This was mainly due to a turnaround, an improvement in economic conditions and a turnaround in their investment portfolio performance. So, technically, performance there not as great as that of Prudential, to date that is.

Standard Life posted a 1.5 per cent drop in gross operating profits in 2009. The company has highlighted the UK as an area for growth and this may explain a bit of the bearish sentiment surrounding the shares right now. Prudential is obviously Asia focused and Aviva is Europe focused.

I think the key there and what explains their sort of I suppose lack-lustre share price performance relative to Prudential has been a lack of, I suppose, strong operating growth. Overall, it's difficult to be overly bearish or overly bullish on the life insurers at this moment in time. I mean a gradual return to operational growth and a stabilisation in investment portfolio performance bodes well for long-term sector earnings.

There is also an argument that due to the global financial crisis consumers will be shocked into saving and insuring more and that of course will benefit sector earnings as well. But I think it will be a long time before this dynamic comes into play as consumers are still focused on paying down debt.

If I had to choose one, I'd go for Aviva rather than the Prudential which has a little bit of takeover risk associated with the shares right now. Aviva's shares trade on a prospective price earnings multiple of around about four and a half times and a prospective yield of 6.7 per cent. The operational growth is on the turn there and it shouldn't be long before we see dividends return to sort of former levels.

Okay, given recent sort of events in Europe, the focus on Europe may sound a little bit strange, but management clearly know what they're doing and having completed a restructuring programme a year early, earnings could well be a year ahead of the game. So definitely one to keep an eye on.

Thanks for watching. Make sure you tune in again next week.