The advent of the euro next year has focused many questions in the minds of investors, both in terms of the viability of treating European insurance companies as a homogenous sector in their own right, as well as the prospects for such companies on the post-Emu horizon.

Stephen Dias, insurance analyst at Goldman Sachs, believes the case for a sectoral approach is clear-cut: We argue that investors should look at the European insurance market as a sector, possessing as it does the common criteria of desired policies and actuarial systems used to determine, say, the chemical industry sector. Insurance groups are also increasingly becoming multinational entities."

He believes that the European life insurance sector is a fundamentally attractive investment prospect, but states two important factors to bear in mind when looking at individual companies.

"Firstly the business must be attractive in its core value and, secondly, the share prices must reflect this. There is no point investing if the share prices are overvalued. We have seen this in Europe, where many companies have a good market position, which is reflected in the price. Similarly, in the UK we have seen prices shoot up to ridiculous levels, severely damping down investment," he says.

One of the underlying features for the attractiveness of the market, he says, is the much discussed demographic problem. The worry that governments are increasingly unable to meet retirement funding has shifted the onus to the individual. The result is exponential growth in company and personal retirement products being bought.

Similarly, long-term savings schemes, particularly on the continent, but also in the UK, are becoming more attractive and enjoying significant tax breaks.

"The prime investment factor in the sector at the moment is this good long-term growth prospect. Looking across the board in Europe, the developed markets, worked out as a percentage of GNP, are the UK, Ireland, France and Holland, with Germany slightly less developed because of its Eastern European ties - but with a lot of potential, and Spain and Italy coming in at about half the level of the others," Dias points out.

This has led to significant investor interest in insurers in the less developed markets and in Germany, where a crunch point for state pension provision is expected in the near future. Insurance groups are expected then to be in a prime position to battle it out for the private savings windfall that follows.

Consequently recommended European companies at present include Italy's Mediolanum and Germany's second largest group Ergo, although Dias suggests there is also some interest in smaller companies in Germany, Italy and Spain, which could be the subject of takeover bids as the demographic situation becomes more urgent.

The current particularly favoured sector though is UK life, due to the government's declared intention of encouraging private pensions. But there are doubts as to the credibility of some values on the market and the wisdom of some investors in their choices.

Robert Burden, pan-European insurance analyst at Goldman Sachs, explains: "We feel the UK market is well overpriced, though we are not in agreement with the market as a whole. Analysts are continuing to recommend these stocks without any sound fundamental reasons, and I think one of the factors here is that fund managers often don't have the time nor the expertise to study some of the crucial factors in the complex insurance market. They tend just to follow the headline sales figures or earnings growth, which for insurance can mean virtually nothing."

Burden suggests a fund manager seeing 40% sales growth in one company but only 3% in another may feel the investment decision is clear-cut, but would be ignoring essential factors in the insurance equation, such as margin slashing or low-growth products. He believes it is imperative to look at the underlying book value before any decision is made.

Legal & General is still very much the golden boy of UK life insurers for investors, with Dutch group Aegon showing strong domestic and foreign interest, and Allianz holding the fort for investors looking at Germany. "If you don't hold Allianz, you don't hold anyone in Germany," says Burden.

However, Kishore Banger, pan-European insurance analyst at Credit Suisse First Boston, says the market is also undergoing a substantial reappraisal at the moment , reflecting the current economic environment in the sector.

"Life companies have been strong for a while, but the low interest rate climate in Europe and the present slump in bond yields, weighed against guaranteed investment rates of return for policyholders is imposing a substantial squeeze on business margins. And companies cannot rely on equity investments to offset the deficit, with the current market unpredictability," he notes.

In terms of how the euro will truly affect the insurance market on the ground, most analysts concur that the matching of investments to liabilities through a single currency will engender both greater efficiency and competition.

Takeover and restructuring will undoubtedly become the buzz words, although the jury is still out on how far companies will rearrange life cover to take advantage of possible advantages elsewhere in Europe. Changing legislation and tax regimes will obviously play a key part.

But as an attractive long-term investment, the European insurance sector is alive and kicking, despite the current blip, although only the strongest and most adept groups may make the grade in the long run.

As Banger concludes: "Those insurance companies with strong balance sheets and reserves to meet the present downturn, but also with the right growth gearing and asset management capabilities to be highly competitive in the future, will be fine. Those which don't will either have to find a solution or suffer the consequences." Hugh Wheelan"