Europe's giants on the march

We ask why observers are so optimistic about their prospects and how their relationship with reinsurers is destined to change.

The national champions of insurance in Europe have beguiled the international markets for years due to their home market strength and growing presence in international markets.

However, it is the ability of these insurance giants—Allianz, AXA, Aviva, Generali, Mapfre and Zurich—to ride out the financial crisis that has made them even more intriguing.

Their results are of course very different, but all six of these ‘national champions’ excelled in 2009 thanks to a mixture of positive investment performance, strong grassroots distribution and effective underwriting in international business lines.

The main event that warrants a collective view of these companies, however, is the approach of Solvency II, the European Union’s new insurance regulatory regime. With economies in Europe on the rebound, the continent has been described as strong growth territory for any insurers capable of leaping the high-jump of Solvency II.

However, smaller companies that fail to satisfy Europe’s impending risk-based solvency rules, which are effective from 2013, could be vulnerable to a buyout from one of the giants eager to expand distribution and premium level.

Chris Waterman, managing director of Fitch Ratings, says: “European insurance groups face many challenges, but the most signifi cant, in Fitch’s view, is successful preparation for Solvency II. Despite other pressures, it is the resource-intensive nature of Solvency II, the scale of the project and the demanding timetable that make it so challenging.”

However, Waterman adds that Solvency II also brings “immense opportunities”.

The thing that sets apart our list of national champions and other large companies is that, as global companies, they all have a sophisticated understanding of Solvency II. The medium-sized players, on the other hand, do not.

Andrzej Czernuszewicz of EMB says that a typical customer, having assessed its fi nancial model and the most capital-efficient approach, may require less cover in some areas and more in others.

“Reinsurers will probably have to accept that their product has become more commoditised and less relationship-driven.”

As such, sophisticated reinsurance companies will be buying reinsurance from a position of strength. “They know exactly what cover they need and how much it is worth to them,” Czernuszewicz adds.

Some European insurers, by contrast, may compensate for their own uncertainty by buying more reinsurance than before, while others that are even less confident about their new solvency capital requirements may become subject to takeovers.

This hypothetical instance is where Solvency II could have a less direct impact on the demand for reinsurance from Europe’s giants. European national champions might consider buying more reinsurance in a quest to set aside capital to take advantage of the predicted M&A activity when small fi rms falter after Solvency II begins.

After the acquisitions, a higher reinsurance spend by the big insurers could also yield a long-term pay-off if it increases a company’s flexibility to maximise distribution channels in the markets in which they have channels that they have acquired.

Chris Waterman of Fitch points out another less favourable by-product of Solvency II—the fact that it could constrain insurers’ agility in responding to new opportunities. “It will mean that insurers in general will have somewhat reduced flexibility in their desire to pursue new geographical opportunities.

“Some lines of business will become less viable as more capital will be required to support underwriting risk, and potential competitive inequalities could materialise between international markets if standards are not interpreted and applied consistently,” says Waterman.

But there is still a lot of work to be done on solvency ii, and some senior fi gures among Europe’s insurance giants have even raised doubts about whether smaller operators can meet the deadline and whether the deadline is viable as a result.

Michael Diekmann, at Allianz, said that while Allianz has supported the risk-based approach of Solvency II, a staggered implementation would “disrupt the competitiveness” of the insurance market. The comments came during the company’s second quarter results announcement. Solvency II plans “need to be reasonable”, he added. “If it takes a bit longer, it will help the entire industry and the entire economy. The normal timeframe would be nice, but I don’t believe this can be done by 2013.”

The European Insurance and Reinsurers Federation (the CEA) has also raised concerns, stating that the proposals for solvency capital requirements were excessively prudent and did not always respect the basic principles of an economic risk-based regulatory regime, as set out in the Solvency II framework directive.

Positive implications

Despite the concerns, Solvency II can be expected to have positive credit implications for the large European insurance groups. Fitch’s Chris Waterman adds. “Large European insurance groups are likely to receive diversification benefit derived through their own capital modelling, leverage is expected to decrease and barriers to entry will increase.

“The large, diversified multinational European insurance groups tend to have more advanced risk management systems than their smaller competitors. On the whole, they have the necessary resources and access to capital markets to meet Solvency II requirements.”

De-risking

Investment returns have been a key element in these insurers’ ability to avoid the worst effects of the global downturn. Yet, there were also lessons for all of them in the structure of their investments.

“There’s no doubt that all of the large capitalised European insurers have de-risked by reducing their exposure to equity investments,” says Ralph Hebgen, an insurance analyst at KBW.

Axa and Allianz, for example, used to have more equity investments and more products with an equity markets angle, such as unit-linked or variable annuity products, in the US.

“If you ask which company is best suited to the current market conditions, it would have to be Generali because its investments have been traditional, as opposed to unit-linked.”

Defying comparison

Europe is now the largest single insurance market, after overtaking North America in 2004 for premium volume. Now Europe’s combined premium stands in excess of $1,800 billion, compared to $1,400 billion for North America.

Six of the top 10 global insurance groups are European, including five of those on our list (all except Mapfre). Another striking fact is that insurance now employs one million people in Europe.

Analysts believe that a return to business growth will be seen first in traditional insurance markets and that companies with established, diversified operations in these markets are the businesses to back.

Europe’s leading insurers may consider themselves first in line to take advantage of such trends, but all face stern challenges from low interest rates, recessionary pressures and soft non-life premium pricing. Reserve risk and changes in life insurance distribution can also be added to the challenges highlighted by analysts and rating agencies.

Beyond healthy growth prospects, and the challenges and opportunities of solvency capital reform, the comparisons between these European national champions begin to diminish.

Each company has a very different global footprint, different specialisms and varying exposures.

“When one looks at some of the long-term commercial insurance underwriters, people are often tempted to put them all under one catch-all generic appraisal, in terms of growth. But the reality is you can’t compare them in the same way,” concludes Ralph Hebgen of KBW.

Allianz

Allianz recovered its risk-based capital adequacy in 2009, due to equity de-risking, further helped by financial markets positively impacting the life-embedded value.

Allianz has a very strong competitive position. It is highly diversified by geography and segment, with market-shaping positions in major European markets and business lines.

The company has traditionally enjoyed a higher operating margin than Axa Generali and Aviva.

It receives about three-quarters of its property & casualty income from foreign markets. Allianz has not ruled out acquisitions in Europe, for additional distribution capacity, rather than for production capacity. However, its US operations—Allianz Life and Fireman’s Fund—will concentrate on organic growth.

Allianz might decide to combine its EU property & casualty operations into a single entity.

Michael Diekmann (55), chairman of the board of management at Allianz, says: “Concentration risks have been reduced and risk management strengthened. Allianz profited strongly from a global flight to quality.

“Asia and Latin America shouldn’t be considered the only growth markets. European life and pensions business is a growth market already and will continue to be a growth market.”

Allianz, the world’s third-largest insurer (2009 figures)

Data (year end 2009)