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Insurance industry - September 2007

Friends Provident agreed to an all-share merger with Resolution to create Friends Financial, but other companies are interested in merging and/or acquiring one or the other. Zurich Financial Services is working on a plan to package up and sell part of its UK life insurance business. After sales of individual self-invested personal pensions increased sharply in the first half of the year, Standard Life was forced to fight off suggestions that it was becoming over-reliant on a single savings product. The cost of floods hit Royal & SunAlliance’s interim pre-tax profits: unlike other insurers, it ruled out across-the-board premium increases on home insurance. Aviva has reported a fall in first half profits in its general insurance business and disclosed high costs from flooding and storms: its home insurance premiums will rise. Animal Friends Insurance, a not-for-profit insurance business, is to offer a discount on its life assurance premiums to vegetarians and fish eaters.

Under new rules on the way the industry is regulated being proposed by the European Commission, customers could enjoy lower insurance premiums. Aegon has agreed to buy companies in the US to increase its sales of variable annuities and distribution in the US. Australia’s QBE Insurance Group has taken its first step into India’s growing general insurance market by signing a joint venture agreement with Rajan Raheja Group. Only 1% of Chinese travellers take out insurance for domestic trips and just 10% do so to cover their overseas journeys. Thee years after China opened its insurance markets to foreign competition, local providers still dominate.

UK

In late July, Friends Provident agreed to an £8.6bn all-share merger with Resolution to create Friends Financial. The deal was hailed as creating a top-five player in the life and pensions market. Takeover speculation has surrounded Friends Provident since it floated in 2001. Subsequently, Pearl Assurance built up a 15.85% stake in Resolution and called on it to halt the deal amid growing suggestions that shareholders on both sides were opposed to the merger. There are suggestions that Pearl might seek a merger of its own with Resolution. In response, Resolution has said that it could change the terms of the deal with Friends Provident from a merger, which requires approval from 75% of its shareholders, to a takeover that needs approval from just half. Meanwhile, a number of life insurers and private equity groups are looking closely at mounting rival bids for Friends Provident.

In an effort to release up to £1bn, Zurich Financial Services is working on a plan to package up and sell part of its UK life insurance business. An investment bank is advising on the securitisation scheme, which it aims to complete in the fourth quarter of this year. The plan would allow Zurich to use the capital to focus on writing more profitable areas of business. Earlier this year, Zurich transferred a £3.9bn book of annuities business to Swiss Re, releasing about £300m. Bankers believe the securitisation deal is likely to be part of a strategy to drive expansion in selected British markets.

After sales of individual self-invested personal pensions (Sipps) increased by 82% in the first half of the year, Standard Life was forced to fight off suggestions that it was becoming over-reliant on a single savings product. Sipps have been available as a long-term savings product since 2001, but have become increasingly popular as a tax efficient pension product since last year’s government-led A-Day liberalisation of the savings markets. Analysts speculate that becoming over-reliant on one income stream might force the company to explore alternative growth areas, such as through mergers and acquisitions. Standard Life is rumoured to have discussed a merger with, or a bid for, Resolution. Its 2m policyholders are to receive windfall payouts from the £1.3bn pot of surplus cash held by the insurer in its with-profits fund (so-called orphan assets). Standard Life will pay the cash to qualifying policyholders as their policies mature, rather than paying out one lump sum to all its customers in one go as AXA did for its customers in 2000.

As a result of floods in June that cost Royal & SunAlliance £55m and the torrential rain in July that cost it a further £65m, interim pre-tax profits fell from £346m last year to £338m this year. Unlike other insurers (see below), the company’s chief executive, Andy Haste, ruled out across-the-board premium increases on home insurance. It did, however, announce 700 job cuts, including 500 positions in the UK, to reduce costs by £70m. These cuts are on top of those announced last year. Separately, Lloyds TSB says it is to close 31 Cheltenham & Gloucester branches, with the loss of 315 jobs.

UK drivers have been warned that the recent flooding will contribute to a rise in car insurance premiums by the end of the year. The Automobile Association says £100m of damage has been caused to vehicles due to the floods. It is estimated that flood waters may have damaged 1.5m cars. Meanwhile, Aviva, which operates its general insurance business under the Norwich Union brand, has reported a 34% fall in first half profits in its general insurance business and disclosed costs of £400m from flooding and storms. As a result, home insurance premiums will rise by as much as 10%. An 8% drop in interim operating profits overshadowed the 24% growth that Aviva reported in its life assurance division. The company also revealed that a planned redistribution of part of £13bn in inherited estates to policyholders would be delayed, but promised an update on negotiations before the end of the year.

Lloyds TSB has also raised its premiums by about 10%. The increase applies to all customers, and not just those affected by the summer floods. Direct Line and Churchill, two other household insurers owned by Royal Bank of Scotland, are also to put up the cost of their household insurance policies, but have declined to say by how much.

Animal Friends Insurance, a not-for-profit insurance business, is to offer a 6% discount on its life assurance premiums to vegetarians and fish eaters. The new life cover product is intended for the estimated 3.5m Britons who do not eat meat or intend to give up in the next 12 months. Medical evidence, the company says, has shown that non-meat eaters are less likely to suffer from serious illnesses, including cancers. It also says the industry has not given adequate weighting to the benefits of vegetarianism.

Europe

Under new rules on the way the industry is regulated being proposed by the European Commission, customers could enjoy lower insurance premiums. Solvency II is expected to recommend lower capital requirements for lower risk businesses. According to Paul Barrett, policy adviser at the Association of British Insurers, the new rules would be equivalent to Basel II for banks but would go further. He added that they presented the opportunity for Europe to have a world-class regulatory framework.

Dutch insurer Aegon has agreed to buy the Merrill Lynch Life Insurance Company and the ML Life Insurance Company of New York for $1.3bn to increase its sales of variable annuities and distribution in the US.

Rest of the world

Australia’s QBE Insurance Group has taken its first step into India’s growing general insurance market by signing a joint venture agreement with Rajan Raheja Group. It will invest A$7m for a 26% stake, with a right to increase its equity stake to 50% if India’s foreign ownership laws are relaxed. Separately, Insurance Australia Group is reviewing several opportunities in India.

Only 1% of Chinese travellers take out insurance for domestic trips and just 10% do so to cover their overseas journeys, according to data from the Greater China AIU Insurance Company (AIG). It says many local insurers are not interested in the travel sector. In developed countries the situation is different: in Japan, 87% of travellers buy insurance before they take a trip. AIG, which has a 75% share of the insurance business for outbound travellers in Shanghai, charges between 10 yuan (67 pence) and 100 yuan (£6.67) depending on the level of cover for travel insurance. It will pay 1m yuan in compensation if an insured traveller dies on a trip.

Thee years after China opened its insurance markets to foreign competition, local providers still dominate. In the property and casualty market, foreign insurance had a market share of just 1.15% in the first half of the year, while foreign life assurers had a 5.79% share. The only foreign insurer to make a consistently strong showing is American International Group. Although foreign groups are not gaining ground, they say due to continuing regulatory barriers, the insurance market has been growing at an annual rate of about 20%, a pace of expansion that looks set to continue. Insurers such as HSBC and AXA Winterthur, that have chosen to invest directly in existing Chinese insurers, have been more successful than those going out on their own or establishing joint ventures.

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