Stockwatch

by Jason Woolfe

Winners
Bradstock up 47%
SVB up 4.6%

Losers
Jardine Lloyd Thompson down 6.5%
Hiscox down 6%

Investors are being bombarded with recommendations to buy into the European insurance sector.

Morgan Stanley and Schroder Salomon Smith Barney are both stressing its value.

Morgan Stanley predicts headline earnings will rise by 43% this year and its taste for non-life and reinsurance led it to tip Swiss Re and Allianz as its favourites.

But it chooses a different strategy for the UK market.

It favours the life insurers, arguing that margins will remain strong in the UK sector.

It tips Prudential, Legal & General and Friends Provident within the domestic market.

The US investment bank downgrades Dutch-based Fortis Group, noting it has outperformed its sector by 20% since the middle of last year.

And it picks out profit warnings from ING, Fortis, AXA, Zurich Financial Services and Allianz as dragging the sector down.

Many of the same names crop up in research published this week (see below) by Schroder Salomon Smith Barney (SSSB).

The US investment bank says the European insurance sector fell by 31% last year, although two thirds of the stocks outperformed the sector and six outperformed the market, if both Fortis quotations were counted as one stock.

The worst performing stocks were AEGON, Royal & SunAlliance, ING, Allianz, AXA, Swiss Life, Skandia and Zurich Financial Services.

The bank's analysts suggest the sluggish performance at the bottom could be due to specific issues - profit warnings at ZFS and an overvaluation at Skandia.

They also point out that the players hardest hit by the 11 September attacks were among the best performers on the rebound as the sector as a whole recovered from the disaster.

Using a similar logic to tip current underperformers, they would choose AXA, Allianz and ING as offering potentially good returns.

The bank expects European corporate earnings to grow this year after declining by an estimated 12% last year. But it predicts growth "will be patchy rather than widespread", with an overall average of about 5%.

For insurers, SSSB says: "Earnings will reach a trough level when full-year 2001 results are declared, assuming that equity markets do not plunge in 2002."

The takeover by Allianz of Dresdner Bank dominated the M&A scene last year,but overall it was a quiet year for mergers and acquisitions.

The takeover by Halifax of Equitable Life in a $1.5bn (£1.04bn) deal was notable as a mid-size purchase.

However, SSSB says many players still have past deals hanging over them and must show they have gained from mergers.

It says this is "crucial to the valuation of Fortis, but it is also important at Allianz, CGNU and ING".

Overall, SSSB discounts the chance of a major rally among insurance shares and raises the possibility of WTC losses escalating further.

It chooses eight stocks to form the backbone of an insurance portfolio.

They are Allianz, AXA, Converium, Fortis, ING, Legal & General, Sampo and Swiss Re.