Posted on Mar 03, 2011 by Sergio Ulloa
As global insurers report earnings for 2010, mixed trading positions are emerging. While some insurers have announced strong growth compared with 2009, other multinational insurers have struggled to create income growth in markets with an underlying position recognizing tough trading conditions.
In general terms, economic conditions in 2010 showed many signs of global recovery following the financial crisis of 2007-2008, which plunged some of the world's leading economies into the worst recession in decades. However, the return to growth has been stimulated by 'quantitative easing' as government's pumped money into the economy to generate improvements in productivity. Many companies in the financial sector - banks and major insurance companies - returned to profitability, enabling repayments of bailout loans provided by national governments to be repaid. The loans were given to prevent businesses collapsing following massive losses triggered by failures in the sub-prime mortgage sector; following the bailouts, shares in many financial sector companies trading on world stock exchanges were able improve substantially.
However, worrying signs started to emerge in late 2010 as the national economies in western hemisphere countries - particularly Greece, Ireland and Portugal - were forced to implement critical austerity measures to prevent financial meltdown. However, the position in the emerging markets of Asia and Latin America have been enjoying rapid growth with the economies in the powerhouse countries of the respective regions (China and India in Asia, Brazil in Latin America); in these areas growth has been reaching double digit levels.
In recent years, multinational insurance companies have been undertaking substantial restructuring, with mergers and acquisitions being progressed to optimize opportunities in the expanding markets in the Asia-Pacific and Latin American regions. This is in addition to the streamlining of organizational structures as part of cost cutting actions.
During 2010 insurance company results have been influenced by a number of major catastrophes and natural disasters, including earthquakes in Haiti, Chile and New Zealand, floods in Pakistan, and forest fires in Australia and Russia. In total, US$37 billion has been paid out by insurance companies to cover insured losses from catastrophic events in 2010.
In terms of individual insurance company results, the following positions were reported:
, the Dutch life insurer which writes most of its business in the USA, UK and Netherlands, reported a fall of 19 percent in net earnings during the fourth-quarter of 2010; net earnings declined from US$541 million to US$438 million year-on-year. Aegon is working towards repaying the Dutch government for a bailout loan provided in 2008, but has struggled to increase written premiums due to being highly dependent on stagnant markets in the USA and Western Europe. However, the Dutch life insurer has undertaken major restructuring in order to cut costs and is planning to accelerate growth in Asia and Latin America markets and is confident that actions taken will achieve long-term benefits.
The American International Group
(AIG) reported a jump in earnings in the fourth quarter of 2010 amounting to US$11.2 billion. This was boosted by the sale of assets, as part of a divestment process; without the capital benefit from one-off sales the New York based insurer had an operating loss of US$2.2 billion from global operations in the fourth quarter reporting period. AIG is also working towards paying back the US government for a bailout loan of US$182 billion.
, one the largest insurers in the world, also recorded an income slide in 2010, with net profits falling 24 percent to US$3.7 billion compared to US$4.9 billion in 2009. The French insurer put the steep fall in profits levels down to the strategic restructuring of global operations, with 2010 being a year of transition for the multinational insurer.
, a member of the Lloyds syndicate, recently reported that profits in 2010 were down to US$191.9 million from US$275.7 million reported in 2009. The London based insurer was hit by high claims resulting from natural catastrophes which happened during 2010 - most notably the earthquakes in Chile and New Zealand.
Australia's QBE, an insurance and reinsurance specialist, also saw a 17 percent decline in profits due to high catastrophe claims, with net earnings down from US$1.70 billion in 2009 to US$1.60 in 2010.
Another global insurer reporting a profit slump in 2010 was Zurich Financial Services, with a 13 percent drop in net income to US$3.4 billion partly due to higher than expected claims for catastrophe cover.
Market leaders in the reinsurance sector - Munich Re and Swiss Re - felt the burdens of a high claims year and the downturn of the global economy. Munich's fourth-quarter earnings for 2010 dropped 38 percent to US$ 663 million, down from US$1 billion in the same reporting period in 2009, mainly on the back of major losses from natural disaster claims in 2010. Meanwhile, Zurich's Swiss based rival - Swiss Re - was hit by a loan repayment to billionaire entrepreneur Warren Buffet; and the substantial claims arising from earthquakes, storms and floods which occurred in 2010 resulting in net income falling by 74 percent compared with 2009 to US$863 million.
However, some insurers reported strong profit growth from operations in 2010, with Allianz
- Europe's largest insurer - reporting income totaling US$6.94 billion - a 22.4 percent year-on-year improvement.
Other insurers reporting improvements in earnings during 2010 include, Manulife, RGA, the Vienna based Insurance Group VIG
and insurance specialist Beazley. These are among some of the global insurers able to report gains in revenue and profitability last year.
Major insurers Zurich, Sunlife and Ageas are among global players in 2011 which have announced expansion plans in their global networks by investing in insurance ventures in emerging growth markets. Swiss insurer Zurich has agreed to pay US$1.67 billion to Banco Santander for access to its Latin American distribution channels
. While Ageas has entered the rapidly growing Turkish insurance sector through a partnership with locally based Hac? Ömer Sabanc? Holding A.?. (Sabanci)
. Sun Life has increased its presence in the Philippines by acquiring a stake in Grepalife Financial
The expectation is that 2011 will see major insurers looking to bolster global presence in the world insurance markets in order to augment premium growth and the strengthening of market positions, either through takeovers or entering into partnership with local operators.
Despite the BRIC countries - Brazil, Russia, India and China - offering insurers new opportunities to increase customers through entry to markets with rapidly expanding economies, there are new worries surrounding action which may need to be implemented to control inflation creating a slowdown in economic activity. There are also concerns that insurers could be faced with the affects of protectionism from local insurance regulators which may hamper growth prospects.
In the mature insurance markets covering the USA, the UK and Western Europe, where recovery from the financial crisis of 2007-2009 is underway, opportunities for insurers to benefit from reforms being introduced in the state provided health services and the recovery from shortfalls in corporate pension contributions are expected to emerge.
In the medium to long-term, the impact of the new Solvency II requirement - which comes into effect in 2013 for financial institutions operating within the European Union - will mean insurers will be obligated to increase their financial reserves to guarantee solvency in times of distress. This new financial regulation means insurers may be wary about making large scale acquisitions or over exposure to financial risk until the full impact of the act is crystallised.
Despite growth among burgeoning insurance markets
within Asia, Latin America, East Europe and the Middle East, multinational insurance companies remain vulnerable to emerging economic conditions such as rising inflation and the potential for an increase in interest rates. These factors could stifle growth and have a trickle-down effect on the insurance sector making premium growth difficult.
Many insurers still remain in transition restructuring to overcome the impact of the global financial crisis with some companies still over exposed in slow-moving sectors with little chance of new premium business. While some insurers will be sceptical about returns in 2011, with the devastating natural disasters in Australia and New Zealand and the political upheaval across the Middle East and North Africa likely to influence results.