Reap rewards of life cover while you are still alive
Andy Brough is a fund manager at Schroders: if you have a question for him, email askandy@financialmail.co.uk.
The big problem with life insurance is that you never see the benefits. You make all those monthly contributions on your policies and just who reaps the rewards?
After you have gone it's your nearest and dearest who pick up the cheque.
So wouldn't it be great to benefit from all those contributions while you are still in a position to?
Life insurers are normally divided into two kinds. The first include those that are closed to new business and are effectively winding down.
The shares have a net asset value, otherwise known as embedded value, that will effectively be returned to shareholders over time. If a business, or shares in one, can be bought below the embedded value, then over time a decent return should be made.
The second kind are life companies that are writing new policies. These policies take a while to become profitable as such companies have expensive sales forces and if the policies are cancelled after a short period then the cost of selling them is not recovered.
Life insurers are not that easy to understand and this is one reason why opportunities exist in the sector. One company managing closed books of life policies - mainly unit-linked policies, protection policies and guaranteed income bonds - is Chesnara.
Running closed books does not require many staff and in fact Chesnara has only a dozen or so employees.
The company's plan is to buy up the closed books of rivals at big discounts to embedded value and let the benefits flow through to its shareholders.
The management has shown discipline in what it will pay. In fact until recently its last acquisition was in 2005. As values now look attractive it has returned to the acquisition trail and in April it announced it was buying Moderna Life, a Swedish insurer still open for business, for £20.5m payable in cash from existing resources.
This is a move away from just buying books but it comes at a massive 63 per cent discount to the company's embedded value at the end of 2008. One reason for the cheap price was that the parent company, now owned by Iceland's Glitnir bank, was a forced seller.
This deal is estimated to increase Chesnara's embedded value by about 34p a share to 205p, compared with a share price of 145.25p. More importantly, it should not affect the progressive dividend policy.
Chesnara is trading at a 29% discount to embedded value and the shares yield 11%, which the company expects to increase. The deal has also left it with sufficient firepower to take advantage of more cheap deals in the sector.
Chesnara is a life insurer where you can enjoy the benefits of those policies while you are still alive.
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