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June 8, 2009

News Digest

Canadian insurers get government backing, New York Life bolsters bank channel capacity, The Hartford decides to go back to its roots, US banks record modest growth in 2008, Strong calls for accounting reform, Activity slides in UK buyout market, Goodbye Norwich Union, Allianz extends Formula One sponsorship, European Life Settlement Association launched, Avivas China strategy achieves a key goal, India moves to liberalise bank channel, Aegon opts for solution from Algorithmics

By Verdict Staff

INDUSTRY TRENDS

Canadian insurers get government backing

Canada’s government has extended a helping hand to Canadian life insurers experiencing difficulty accessing the wholesale capital market with an announcement by the minister of finance, Jim Flaherty, of the establishment of the Canadian Life Insurers Assurance Facility (CLIAF).

Under the CLIAF, life insurers will be eligible for a guarantee against defaults of payment of principal, accrued and unpaid interest on debt instruments issued with a maturity of over three months.

The guarantee will be limited to a maximum of three years from the date of issuance.

Debt instruments covered by the CLIAF may be denominated in Canadian dollars, US dollars, euros, sterling and yen with a minimum issuance size of C$1 million ($918,909) for Canadian dollar denominated instruments and C$10 million for instruments in the other four currencies.

Guarantees, however, come at a price. For insurers that meet minimum credit ratings on senior unsecured medium-term debt obligations the fee is 110 basis points of the gross proceeds of the guaranteed instrument, while for those not meeting the minimum rating requirements the fee is 135 basis points.

 

COMPANIES

New York Life bolsters bank channel capacity

Riding high on surging fixed annuity sales in the US, mutual insurer New York Life (NYL) has bolstered its bank channel sales capacity significantly.

According to NYL the number of internal sales specialists has increased by 100 percent, regional wholesalers by 30 percent, retirement income specialists by 50 percent and service staff by 40 percent, for a total of more than 100 new hires.

“Sales of New York Life’s fixed annuities in the bank channel surged 130 percent and sales of income annuities almost doubled in 2008, fuelling the need for growth in sales support,” explained Andrew Reiss, vice-president and national sales manager for NYL’s bank channel.

He continued: “Our sales growth is evidence of this flight to quality: bank clients recognise that fixed annuities from New York Life, a financially stable, triple-A rated company, offer that stability and growth potential they seek.”

According to consulting and research organisation LIMRA International, NYL recorded total fixed annuity sales of $9.05 billion in 2008, giving it a market share of 8.3 percent and ranking it as the second-largest producer. (See US fixed annuity sales continue to roar ahead.)

 

COMPANIES

The Hartford decides to go back to its roots

Ramani Ayer chairman and CEO of The Hartford ended market speculation that the US insurer was about to put its general and life insurance operations on the selling block.

His statement followed news that The Hartford had obtained preliminary approval from the US Treasury to receive $3.4 billion under the Troubled Assets Relief Program (TARP).

“We [the board and senior management] have concluded that the best way to deliver long-term value to our shareholders is to return to our historical strengths as a US-centric insurance company, with a focus on our strong portfolio of protection businesses, primarily property and casualty, group benefits and life insurance,” said Ayer.

He added that The Hartford would also retain its wealth management and retirement businesses, including mutual funds, retirement plans and what he terms “a restructured annuities business.”

In addition to the anticipated TARP capital injection, The Hartford received $2.5 billion in a capital investment from European insurer Allianz in October 2008.

The insurer has also announced a significant scaling back of international operations including withdrawal from variable annuity markets in Japan and the UK.

In the first quarter of 2009, it reported a net loss of $1.21 billion following net losses of $806 million and $2.63 billion, respectively, in the previous two quarters.

 

BANCASSURANCE

US banks record modest growth in 2008

US bank holding companies (BHC) recorded combined insurance revenue of $10.15 billion in 2008 – an increase of 7.2 percent compared with 2007, reveals data published by research firm Michael White in association with industry body the American Bankers Association.

According to the report BHC brokerage fee income in 2008 decreased from a record high in 2007, with revenue growth in 2008 attributable to a 32 percent increase in insurance underwriting revenue to $4.65 billion.

Topping the list of BHC’s was Citigroup with revenue of $3.22 billion, almost a third of total BHC insurance revenue. Citigroup was followed by Wells Fargo ($1.83 billion), Bank of America ($1.82 billion), BB&T Corporation ($928 million) and HSBC North America ($506 million).

During 2008, 586 bank holding companies (or 67 percent of all large top-level BHCs) reporting earned some type of insurance-related revenue.

 

INDUSTRY TRENDS

Strong calls for accounting reform

The International Association of Insurance Supervisors (IAIS) has called on the International Accounting Standards Board and the US Financial Accounting Standards Board to issue a single set of converged accounting standards for financial instruments as soon as practicable.

The IAIS’ call follows a recommendation made by the G20 for accounting standard bodies to take action before the end of 2009 to reduce complexity of accounting standards for financial instruments.

The G20 comprises finance ministers and central bank governors of the world’s 19 largest economies and the European Union.

“Thus far the insurance industry has weathered the financial crisis well. However, overall the financial sector has seen too many cases of over-optimistic valuations leading up to the current financial crisis,” commented the chairman of the IAIS’s technical committee, Al Gross.

He continued: “Accounting arbitrage, with the accounting rules changing every few months, is too tempting in difficult times.

“We believe the time is ripe to develop a single set of converged accounting standards for financial institutions.”

 

PENSIONS

Activity slides in UK buyout market

Activity in the UK’s pension buyout/buy-in market decreased appreciably in the first quarter of 2009 with total deals amounting to £879 million ($1.4 billion), reveals data from actuarial consultancy Hymans Robertson.

Indicative of the sharp slowdown, insurance broking and risk management service provider Aon reported buyout/buy-in activity of £1.5 billion in the first quarter of 2008 and £8.2 billion for 2008 as a whole.

In total 43 buyout/buy-in deals were executed in the first quarter of 2009, with Legal & General maintaining its leading market position with 25 deals worth a total of £485 million.

This compared with a total of £1.82 billion recorded by the UK insurer in 2008 as a whole.

Buyout specialist UK-based Pension Insurance Corporation was in second position with a single deal worth £230 million, the largest recorded in the first quarter of 2009.

Of a total of 11 participants in the UK’s buyout market, only five secured deals during the first quarter of 2009.

 

COMPANIES

Goodbye Norwich Union

On Monday 1 June Norwich Union (NU) officially adopted the name Aviva, marking one of the most significant steps in UK insurer Aviva’s strategy of having a single brand in all its 28 global markets.

“A consistent, recognisable name and branding across its markets around the world is an important part of Aviva’s strategy to succeed in an increasingly competitive and global marketplace,” commented Aviva’s CEO Andrew Moss.

NU’s name change marked the demise of a brand-name dating back to 1797 when the insurer was founded as Norwich Union Society for the Insurance of Houses, Stock and Merchandise from Fire.

Outside the UK, Aviva’s Irish unit Hibernian Life & Pensions and its Polish unit Commercial Union Poland will complete the name change to Aviva in 2010.

Aviva’s chief marketing officer Amanda Mackenzie, said benefits of the unified global branding strategy were already being seen in the form of lower marketing and sponsorship costs.

 

MARKETING

Allianz extends Formula One sponsorship

Formula One (F1) motor racing has had its fair share of problems this year but at least one positive piece of news has come in the form of Allianz’s decision to extend its support for the sport until the end of 2010.

According to Allianz its sponsorship consists of a contract for trackside branding, an official global partnership with Formula One and a team partnership with AT&T Williams.

“Extending our partnership clearly underlines our long-term commitment to Formula One,” said Steven Althaus, Allianz senior vice-president global market management.

“It is a perfect platform to reach millions of people worldwide every race weekend.”

Allianz entered the F1 arena via a team partnership with Williams in 2000. In 2002 it extended its involvement through on-track advertising and in 2006 through pit lane branding.

Allianz’s decision is in sharp contrast to rival ING Group which announced in February that it would not renew its three-year sponsorship agreement with Renault F1 when it expires at the end of 2009.

 

LIFE SETTLEMENTS

European Life Settlement Association launched

With little of the fanfare that has accompanied development of its US counterpart, Europe’s life settlements market has grown into a market with total assets of €9.5 billion ($13 billion).

To an extent the European market’s low profile has resulted from the absence of a representative industry body, something that changed in May with the launch of the European Life Settlement Association (ELSA).

“An important part of ELSA’s role in overseeing the European life settlement market will be to educate and inform investors in both the retail and institutional markets,” explained the new body’s co-deputy chairman Richard Morris, an actuary at German bank Commerzbank.

“Currently, too much time is spent sourcing information on life settlements and checking its accuracy,” Morris continued.

“ELSA will aim to produce regular and accurate information on products and markets in an independent manner, so that we promote fairness and transparency for the life settlement market across Europe.”

ELSA’s other co-deputy chairman, Patrick McAdams, investment director of UK life settlements specialist Surrenda-link Investment Management, noted that the new body has received widespread support from industry leaders including Doug Head, executive director of the US Life Insurance Settlement Association.

Head is one of the 10 members of ELSA’s steering committee.

 

DEVELOPING MARKETS

Aviva’s China strategy achieves a key goal

UK insurer Aviva has entered the final phase of its 10x10x10 China Growth Strategy with the opening of an office in China’s Hubei Province by its Chinese joint venture (JV) life insurer Aviva-Cofco which now operates in 10 provinces and has a total of 40 city branches.

The growth strategy began in 2003 with the opening of Aviva-Cofco’s first office in China at which stage its set a target of establishing branches in 10 target provinces and achieving an average 10 percent total market share in new business premiums generated by foreign insurers by 2010.

According to Aviva, Hubei is China’s 10th-largest province in terms of GDP and currently has low levels of insurance penetration.

Established in 2002 as a JV between Aviva and China Cereal, Oil and Foodstuff Group, Aviva-Cofco reported premium income of CNY3.85 billion ($560 million) in 2008. This ranked it as the second-largest foreign life insurer in China.

 

BANCASSURANCE

India moves to liberalise bank channel

A more liberal regulatory dispensation is potentially in the making in India’s bancassurance market, in which banks are currently limited to forming agency distribution agreements with only one insurer.

Responding to requests from numerous life and general insurers and banks the Insurance Regulatory and Development Authority (IRDA) has appointed a committee to investigate regulatory change that would enable banks to form alliances with more than one insurer.

The committee will also investigate the possibility of separate regulatory requirements for the bancassurance channel.

Seemingly well disposed to a liberalisation of the market the IRDA noted that Indian banks’ extensive branch network could be used more effectively to expand insurance penetration.

The seven-member committee comprises one representative from the IRDA, five current and former insurance industry executives and an executive from consultancy Watson Wyatt.

 

RISK MANAGEMENT

Aegon opts for solution from Algorithmics

In a move aimed at enhancing its risk management capabilities, Dutch life insurer Aegon has selected Algo Risk, a risk and capital management solution developed by Canadian risk management software and service specialist Algorithmics.

Commenting on Algo Risk, Mike Dorsel, Aegon’s vice-president, economic framework integration, said: “We were looking for an industrial strength, enterprise-wide risk platform to implement portfolio replication for Aegon worldwide.”

According to consultancy Watson Wyatt portfolio solutions replicates, as closely as possible, the value and market sensitivity of a portfolio of insurance liabilities in different economic scenarios.

Replicating portfolios can also provide valuable information on the nature of financial exposures in insurers’ insurance portfolios and enable swifter production of risk-based capital assessments.

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