HEARD ON THE STREET: European Insurers Struggle For Cover

23rd Jun 2010 11:36

By Hester Plumridge A DOW JONES COLUMN It may look like a rush for the exits, but in reality it's a tactical withdrawal. European insurers are reevaluating their commitment to the U.K. market. French insurer AXA is selling the bulk of its U.K. operations to consolidator Resolution while Dutch rival Aegon is restructuring its U.K. business, cutting costs by 25% at its life insurance and pensions operations by 2011. But this is unlikely to presage the long-anticipated sector consolidation: prospective buyers remain scarce and pressures to sell are low. Sure, the U.K. market faces challenging dynamics. New business is 40% less profitable than insurers' existing book, and replaces only 80% of existing premiums by volume, estimates Citigroup. Weak economic growth could undermine already weak savings rates. Competition is intense, and barriers to entry are falling as insurers shift to selling less capital-intensive products. Upcoming European regulations could force insurers to hold more capital against many product lines, while new global bank capital requirements are likely to remove the special treatment of the insurance divisions of banks. But regulatory changes are some way off and still in flux. Neither AXA nor Aegon was under pressure to sell. AXA's decision partly reflects the high price it was offered: its assets are being sold at around 0.7 times embedded value, in line with U.K. sector valuations. But Resolution was desperate to do a deal and willing to pay up; most other prospective bidders would require a substantial discount, which is why Aegon ruled out divesting its U.K. business and decided to restructure instead. Besides, opportunities to buy growth elsewhere are still limited. The majority of proceeds from AXA's sale will remain on its balance sheet. Both AXA and Aegon are seeking to reallocate capital from developed to fast-growing emerging economies. But European insurers complain that assets in markets such as Asia come up for sale rarely, and at multiples way above their own, making acquisitions difficult - as Prudential PLC discovered. Until that changes, disposing of developed market assets is unlikely to be a priority. (Hester Plumridge is a writer for Heard on the Street. She can be reached on +44 20 7842 9267 or [email protected]) TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at [email protected]. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments. (END) Dow Jones Newswires June 23, 2010 06:36 ET (10:36 GMT)