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From
October 2009 Resource
Global Outlook
The economic crisis is transforming the global life, pensions and asset
management markets. Here’s a look at the shape of things to come and how some
companies are positioning themselves for success.
By Jennifer C. Rankin
Will our business ever be the
same? Probably not. Can we turn adversity into opportunity? Absolutely.
To understand the decisions CEOs
are making this year, it’s important to remember what they faced last year:
the deepest financial crisis since the 1930s.
During the second half of 2008,
the economy took a huge hit. After the bankruptcy of Lehman Brothers and the
bailout of American International Group (AIG), stock markets tanked. Two stock
indexes say it all: the U.K. FTSE 100 index performed best (-32 percent) and the
MSCI Emerging Markets index fared worst (-55 percent). Shares of financial
institutions were hit the hardest.
As it became clear that the
economy was deteriorating rapidly, central banks around the world quickly
lowered interest rates, many to zero percent. To provide liquidity to the global
financial system and to keep the credit system functioning, they also took
unconventional monetary policy measures.
Since then, capital markets have
improved. Corporate bond spreads narrowed, stock markets stabilized and
corporate bond emissions recovered, although from very low levels.
The credit market, however, has
yet to thaw, making it exceedingly difficult for companies to access capital. In
addition, low investment yields, the high cost of guarantees and low asset
management fee revenues have caused life insurance company profitability to
deteriorate.
In 2008, worldwide insurance
premiums were US$ 4.27 billion, with life insurance accounting for US$ 2.49
billion, according to Swiss Re’s annual sigma report on world
insurance. For the first time since 1980, premiums declined in real terms, with
life premiums falling by 3.5 percent. Investment results and the return on
equity fell sharply in life insurance. Shareholder capital in life companies
shrank by 30 to 40 percent.
While these losses were high, the
industry coped well, says Swiss Re. The vast majority of insurers had sufficient
risk capital to absorb the losses. The exceptions are the U.S. monoliners and a
handful of U.S. and European companies that turned to the government for
support. There have been a handful of bankruptcies as well.
The 3.5 percent fall in global
life insurance premiums can be attributed to a decline in the industrialized
countries (-5.3 percent) and double-digit growth in the emerging markets (+15
percent), Swiss Re reports. The falling premium volume in the industrialized
countries was related to single premium business and products linked to equity
markets. Much of the drop happened in the second half of 2008 as a result of the
financial crisis. Unit-linked business also declined in many of the emerging
market countries during the second half of 2008.
The financial crisis and the
ensuing economic downturn severely affected sales of unit-linked products,
particularly single premium products, in the U.K., Italy, France and Ireland,
where such products are common, says Swiss Re. Markets with a high share of
regular premium products, such as Germany, were more resilient. Double-digit
declines of variable annuity sales in the U.S. caused premium income in that
market to fall by 3.8 percent. Overall growth in sales of some non-linked
savings products, such as fixed annuities and traditional life savings, was not
enough to offset declines in the unit-linked business.
Although life insurance premiums
in the newly industrialized Asian economies declined, premiums in Japan grew by
9.6 percent, compensating for some of the declines prior to the privatization of
the postal system.
In the emerging markets, life
premiums rose 15 percent in 2008, exceeding their 2007 growth of 13 percent,
according to Swiss Re data. Growth continued to be very strong in South and East
Asia (+19 percent). In Central and Eastern Europe, premiums also increased 19
percent; however, Poland’s exceptional growth (+52 percent) conceals the fact
that premium volumes actually declined in Russia and in the remaining Central
European countries due to falling sales of unit-linked products. Finally, the
growth of life premiums in Latin America and the Caribbean slowed to seven
percent in 2008.
Competitive
Realignment
PricewaterhouseCoopers believes
the international financial crisis will cause a deep competitive realignment of
the global insurance industry.
"This shake-up will
challenge the competitive relevance of some insurers," according to Emerging
from the Storm, a report the consultant released last month. "However,
it also offers agile and far-sighted firms a once-in-a-generation opportunity to
catapult themselves to the front of what will be a very different racing order
within many geographical markets and classes of business."
The report describes an unfolding
environment of changing expectations of the insurance sector from governments,
regulators, customers and investors.
"The developments we see
today are only the beginning," PwC said in a statement accompanying the
report. "The environment will continue to evolve at a rapid pace over the
next two to three years, ruling out any return to the relative stability and
certainty that preceded the crisis."
In PwC’s view, the
international insurance industry will be marked by such factors as organic
restructuring, increasing uncertainty over taxation, pressure on reinsurance
sales in developed markets, and a growth in both regulation and government
assertiveness toward the industry.
The winners in the coming
environment, said PwC, will be those companies that will be able to understand
the long-term competitive implications of the current economic downturn.
Any story about competitive
realignment must have beleaguered giant AIG as the lead case study.
Rescued by the U.S. government
last fall, AIG has received US$ 182.5 billion in federal bailout money and is
now 80 percent owned by U.S. taxpayers. In September 2008, Edward Liddy, former
Allstate chairman, replaced Robert Willumstad, who stepped down after three
months on the job, as chairman and CEO and announced a broad plan to sell assets
to repay its loan from the government. In August, Robert Benmosche, former
chairman, president and CEO of MetLife, took the helm.
Since January, AIG has:
*Sold
its HSB Group to Munich Re (Germany).
*Sold
its U.S. auto insurance business to Zurich Financial Services
(Switzerland).
*Sold
its consumer finance operations in Mexico.n Sold
its asset management unit, AIG Investments, to Richard Li, the Hong Kong
tycoon. The unit operates in 32 countries and has some US$ 89 billion in
assets.
* Taken bids for Nan Shan Life, its Taiwan
life insurance unit.
*Formed
a special purpose vehicle (SPV) for American International Assurance (AIA), a
life insurer that covers China and other parts of Asia except for Japan. AIG
intends to publicly list AIA in Asia during 1Q10 and analysts expect the sale
will raise between US$ 5 and 10 million. A leading company in Asia, AIA has
more than 20 million customers, 250,000 agents, US$ 60 billion in assets under
management, a broad network of distribution partners and a strong brand
presence. AIG may incorporate the Philam Group of companies, based in the
Philippines, and ALICO Taiwan into the AIA Group.
*
Formed an SPV for ALICO, AIG’s international life business. AIG intends to
publicly list ALICO in New York. ALICO operates in 54 countries and has 19
million customers, 40,000 agents and distribution partners, and US$ 89 billion
in assets under management.
*
Formed an SPV for its property/casualty operations (AIU) and rebranded the
business under the name Chartis.
For the first time since 3Q07,
AIG posted a profit for 2Q09.
One of the first companies to
respond strategically to the financial crisis was ING Groep NV, a global
financial institution of Dutch origin that offers banking, investments, life
insurance and retirement services.
In January, ING announced it
expected hefty net losses in its fourth quarter 2008 results, primarily from
asset impairments and losses. The company also announced it would cut 7,000
jobs, about six percent of its total 125,000 workforce, in order to save EUR 1.1
billion. Separately, ING announced its chief executive officer, Michel Tilmant,
would step down immediately and Jan Hommen, who chaired the company’s
supervisory board, would become its new chief executive. In addition, ING
entered into an agreement with the Dutch government on an Illiquid Assets
Back-up Facility covering 80 percent of the company’s Alt-A mortgage
securities.
According to the company, the
measures taken are "to counter the implications of the persistently
challenging economic and market conditions. In order to adapt the organization
to the new business environment, ING is taking several steps to reduce risk and
expenses and increase focus on its core savings and investment business."
Since then, the company has moved
swiftly and decisively to define and focus on a core franchise for the new
economic climate.
By the end of February, ING had
sold its 70 percent ownership stake in ING Canada, the largest property/casualty
insurer in Canada, to a group of institutional investors and a syndicate of
underwriters. It also had also closed the sale of its Taiwanese life insurance
business to Fubon Financial Holding, a leading, diversified Taiwanese financial
services company.
At the bi-annual ING Investor Day
on April 9, CEO-designate Jan Hommen gave a keynote speech to discuss the
particulars of his plans to reduce costs, risk and leverage as well as his
intent to focus the company on fewer, coherent and stronger businesses.
"The economic crisis is
fundamentally changing the financial services industry," he said. "Now
is the time to choose where ING has the scale and strength to succeed in the
current environment and to position the company to be a leader when the markets
recover." To that end, ING will:
*
Continue to reduce cost, risk and leverage (debt).
*
Reduce complexity by operating its bank and insurance enterprises separately
under one group umbrella.
*
Create a predominantly European bank with one integrated balance sheet.
*
Further narrow the focus of insurance to life and retirement services.
*
Shift the risk profile of its U.S. insurance business.
*
Form one global investment manager that includes real estate investment
management.
*
Divest, over time and as market conditions permit, EUR 6 to 8 billion in
non-core activities.
By April, ING had made much
progress toward these goals.
Hommen said that de-risking
measures were on track, with the Alt-A Back-up Facility finalized and equity and
interest rate risk reduced significantly. Half of the target to reduce the bank
balance sheet by EUR 110 billion had been accomplished. And the EUR 1 billion
cost reduction initiative was well on track, with more than half of the planned
7,000 full-time employee workforce reduction realized.
He also discussed ING’s plan to
reduce its geographic and business scope by building on positions in markets
with the strongest franchises. To that end, ING will divest a total of 10 to 15
businesses over the coming years. It also will exit 10 of the 48 countries in
which it operates. The strategy should result in total proceeds of EUR 6 to 8
billion as well as EUR 4 billion in freed-up capital. "As a result of this
process," said Hommen, "ING will become a more focused group, with
substantial earnings power and significant growth potential."
ING’s banking activities will
now be based on its proven strengths: gathering savings, distribution
leadership, simple propositions and strong marketing. The bank will be
predominantly focused on Europe with selective growth options elsewhere. It will
have one integrated balance sheet and one management team.
ING’s insurance business will
focus on its long-term structural leadership positions in life and retirement
services. The business will be managed regionally with an aggregated balance
sheet. Key building blocks will include the operations in the Benelux, United
States, Central Europe, Latin America and Asia/Pacific. ING intends to make a
fundamental risk profile shift in the United States by focusing on individual
life and retirement services and transitioning its variable and fixed annuity
business to low-risk rollover products. It also will review strategic options
for its non-core U.S. businesses, including employee benefits, group reinsurance
and the existing annuity books. The U.S. Financial Products division will be
reduced as assets mature. ING will sustain its life insurance/retirement
services leadership positions in the key growth markets in Central Europe, Latin
America and Asia/Pacific. The life insurance activities in China and Japan are
under review.
ING’s investment management
operations in Europe, the Americas and Asia/Pacific will be integrated into one
global investment management organization to leverage synergies in marketing,
operations and distribution and sales. This organization will also include real
estate investment management. Real Estate Development will manage down capital
exposure and will become part of the Commercial Bank, as will Real Estate
Finance.
"We are taking ING back to
basics on all levels," said Hommen. "The crisis has reinforced the
need for us to be even more in touch with our customers. We need to put our
customers first in everything we do and we will make the relationship with our
customers our most important objective. We will be focusing on fewer but more
transparent products. We will streamline processes to make them more efficient
and steer towards operational and commercial excellence. Our governance model
will be adapted to our strategy, with rigorous business performance reviews and
reinforced accountability. This will result in a company that is easier for
customers, motivational for employees and more predictable for
shareholders."
Since the April update, ING has
sold its annuity and mortgage businesses in Chile to Corp Group Vida Chile, SA.
The sales, announced on July 31, do not impact ING’s pension, life insurance
or investment management businesses in the country, where ING remains committed
to developing leadership positions.
ING’s back-to-basics strategy
is paying off. On August 12, the company announced 2Q09 results, which included
an underlying net profit of EUR 229 million (compared to a EUR 305 million
underlying net loss the previous quarter). De-leveraging, de-risking and cost
containment measures were on or ahead of targets. All key capital and leverage
ratios were strong. Shareholder’s equity increased by EUR 2.9 billion.
Headcount has been reduced by 8,219 FTEs, well ahead of the original plan of
7,000 for the year.
Nonetheless, important challenges
remain. ING wants to repay the Dutch state, which gave the company EUR 10
billion of emergency aid in October 2008, the height of the global financial
crisis. The company must meet the restructuring requirements set out by the
European Commission for financial institutions that received state aid. Sales of
investment-linked insurance products remain subdued as customers await a
sustained market rally or opt for traditional life products. The global economic
climate is still weak, generally speaking.
ING also must find buyers for the
assets it wants to divest. Hommen says ING has had buying interest for some of
its assets, but the offers received so far haven’t met its valuations. He
expects the market for selling them to improve over time.
At press time, industry insiders
were reporting ING had up to five bids for its private banking businesses in
Asia and Switzerland. Among the alleged bidders are Swiss firm Julius Baer,
Singapore’s DBS Group, and British bank HSBC.
Aggressive Steps
AEGON NV
also has taken aggressive steps to refine its global strategy. During the height
of the financial crisis, the multinational accepted a EUR 3 billion infusion
from the Dutch state and shortly thereafter withdrew its application for
participation in the United States’ Troubled Asset Relief Program (TARP). At
its June analyst and investor conference, Alex Wynaendts, CEO, emphasized that
AEGON’s three long-term strategic priorities were unchanged, just fine-tuned
for the post-crisis world:
*
Reallocate capital to the most attractive businesses. In 2010+, adhere to this
strategy as well as no entry into new countries. In addition, sell the
Taiwanese life business, refocus Canadian business, withdraw from the group
risk business in the United Kingdom, enter the Turkish and Brazilian life
market, and grow joint ventures with savings banks in Spain.
*
Improve growth and returns. In 2010+, adhere to this strategy as well as
reduce financial market risks and consolidate within market segments. Includes
cutting costs, aligning the Americas organization and tapping new senior
management in the Netherlands and Canada.
*
Manage AEGON as an international group. In 2010+, adhere to this strategy as
well as create one global asset management organization, integrate risk and
capital management, and implement a European variable annuity strategy
AEGON has strong life insurance,
pensions and asset management franchises around the world and is well positioned
in key markets. It is in the midst of a rebalancing program, the goal of which
is to reallocate capital to businesses with higher growth and return prospects.
In 2007, AEGON allocated 60 percent of capital to the United States, 30 percent
to Western Europe and 10 percent to three emerging markets (Central and Eastern
Europe, Asia and Latin America). Its target allocations for 2012 are 40 to 50
percent to the United States, 25 to 35 percent to Western Europe, 15 to 25
percent to the three emerging markets, and five to 10 percent to global
businesses.
Geographically speaking, its
goals are:
*
Refocus the Americas business, creating three main divisions: life and
protection; individual savings and retirement; and employer solutions and
pensions. Expand in employer solutions and pensions. Broaden distribution.
Capture synergies.
*
Return to profitable growth in the Netherlands. Increase market share in the
SME pension market. Expand direct distribution. Change culture to achieve a
better focus, clear accountability, and service excellence. Reduce operational
expenses.
*
Derive more value from in-force business in the United Kingdom. Focus on
retention and cost containment. Improve customer service, product and channel
innovation and brand awareness.
*
Realize scale in emerging markets. In Central and Eastern Europe, grow
leadership positions, develop strong tied network, strengthen broker
relationships, capture more synergies at the regional level, and focus on
existing markets. In Asia, focus strategy. Sell life insurance business in
Taiwan and further develop existing businesses. In Latin America, grow in
existing markets. Focus on Mexico and Brazil.
For 2009, AEGON is focused on
capital, costs and contingency. To date, it has amassed close to EUR 3 billion
in excess capital above the AA rating and is now able to withstand further
market shocks. It also is close to reaching the goal of reducing costs by EUR
150 million. Contingency plans are in place and AEGON aims to pay back EUR 1
billion to the Dutch state by year end.
Two months before the June
meeting AEGON completed its acquisition of the Polish pension company PTE
Skarbiec Emerytura SA. Two months after the meeting, it completed its
acquisition of Banca Transilvania’s 50 percent stake in BT Aegon, the Romanian
pension business the two companies set up last year, giving it 100 percent
control.
ING also has sold its Taiwanese
life business and has entered Brazil, the largest life insurance market in Latin
America, in a joint venture with Mongeral.
One company, Hartford
Financial Services, is returning to its historical strengths as a
U.S.-centric insurance company. In June, then Chairman and CEO Ramani Ayer, said
the company will now focus on its strong portfolio of protection businesses,
primarily property/casualty insurance, group benefits and life insurance. He
added that The Hartford also would retain its wealth management and retirement
businesses, including mutual funds, retirement plans and what he called "a
restructured annuities business."
His statement followed the news
that The Hartford had obtained preliminary approval from the U.S. Treasury to
receive US$ 3.4 billion under the Troubled Assets Relief Program (TARP). At the
height of the crisis, the insurer received US$ 2.5 billion in a capital
investment from Germany’s Allianz.
The Hartford is significantly
scaling back its international operations, including withdrawing from the
variable annuity markets in Japan and the
United Kingdom.
Ayer will retire at year end. It
will be interesting to see if the as yet unnamed replacement will follow the
same strategy.
International
Expansion
Despite the turmoil in the global
economy, nearly two-thirds (62 percent) of insurers plan to grow outside of
their home market in the next 12 months, according to findings of a global
survey released by Accenture in June.
The survey queried 104 leading
life and property/casualty insurers in 16 of the world’s largest insurance
markets to better understand how they envision profitable international
expansion in the current economic and financial turmoil.
Three-quarters (75 percent) of
respondents said they believe that the current economic and financial turmoil
will offer more opportunities to grow outside of their home market in the next
three years. When asked to cite drivers of their companies’ anticipated
international expansion, spreading risks and balancing business cycles was cited
most often (77 percent), followed by managing costs more efficiently (74
percent).
The respondents also expect
increased competition in the developing markets. More than eight out of 10
insurers (84 percent) from industrialized countries and nine out of 10 insurers
(92 percent) from emerging economies said that emerging markets are a priority
for them when expanding outside of their home market. When asked to select the
regions in which they expect to invest over the next three years, respondents
most often cited the BRIC countries of Brazil, Russia, India and China (48
percent), followed by other Asian countries (43 percent) and Western Europe (36
percent). Within the BRIC countries, China was cited most frequently, followed
by Brazil, India and Russia.
Many insurers still have the
financial means to implement the expansion strategy they set before the
financial crisis, while others are considering international expansion for the
first time as a way to grow in the post-crisis world. Everyone is eyeing AIG
franchises.
South Africa’s Sanlam,
for instance, just announced it intends to roll out about two new offices each
week in India for the next two years.
"As others like AIG pull
back, there are big opportunities for people like us," CEO Johan van Zyl
told Bloomberg in a recent telephone interview. "We have set aside 75
million rand (US$ 9.7 million) for the next two years."
Sanlam owns 26 percent of India’s
Shriram Life. If the anticipated change in Indian regulations happens, Sanlam
may be able to increase its stake in Shriram by the end of the year. Sanlam has
set aside 500 million rand for
the transaction.
Bloomberg also interviewed Donald
Guloien recently. The CEO of Canada’s Manulife, Guloien said the
company may triple its offices in China over the next five years. Manulife,
which now has 36 offices in the country through its Manulife-Sinochem Life joint
venture, plans to increase its presence to between 75 and 100 cities and triple
its agents to 30,000. The venture also is seeking to distribute its products
through banks and brokerages.
Guloien, who took over the top
position from former CEO Dominic D’Alessandro in May, has identified Asia as
one of Manulife’s areas for growth, along with Europe. Profit from its Asia
and Japan division more than quadrupled to CDN 885 million in 2Q09 on gains from
its variable annuities operations.
Nevertheless, it has been quiet
on the deal-making front this year as everyone considers their options.
"Everyone wants to keep their powder dry," said Robert Kerzner,
president and CEO of LOMA and LIMRA, in an April interview with ratings agency
A.M. Best. "They want to be sure they know what they’re buying. And [they
want] to see how cheaply a company could be acquired and how the economy shakes
out."
A scan of industry newsfeeds from
the last 12 months reveals what little action has taken place has happened in
the Asia Pacific region:
* China. Ping An and
Compagnie Financiere Tradition (Switzerland) launched a joint venture money
brokerage company, the country’s third. Generali (Italy) acquired a 30
percent stake in asset manager Guotai AMC. Ping An increased its stake in
Shenzhen Development bank from five to 30 percent. Allianz China Life opened
an eighth branch in the country. HSBC Holdings (U.K.) received regulatory
approval to launch a joint venture life insurance company with National Trust
Ltd. MassMutual received regulatory approval to buy a 19.9 percent stake in
Yingda Taihe Life. Regulators gave Bank of Communications permission to buy a
51 percent stake in China-Life CMG Assurance, a joint venture between
Commonwealth Bank of Australia and China Life. Old Mutual (U.K.) pulled out of
a deal to buy a 49 percent stake in asset manager ABN Amro TEDA FMC.
* India.
MetLife India opened 12 new branch offices in Kerala. Allianz (Germany) and
Bajaj Group agreed to establish an asset management joint venture company in
the country.
* Indonesia.
Sun Life Financial (Canada) and CIMB Group agreed to establish a joint venture
life insurance company in the country.
* Japan.
Failed life insurer Yamato Life resumed operations as part of the U.S.
insurance group Prudential Financial, renamed Prudential Financial Japan Life.
Regulatory authorities gave AEGON (Netherlands) and Sony Life permission to
launch a life insurance joint venture company. Hartford Financial Services
(U.S.) suspended writing all new business in the country.
*
South Korea. In June, BNP Paribas Assurance (France) increased its
stake in SH&C Life from 50 to 85 percent and made it a subsidiary company;
original joint venture partner Shinhan Financial will keep a 15 percent stake.
New York Life (U.S.) announced it will pursue an aggressive growth plan in the
country.
* Taiwan.
Manulife Financial (Canada) launched a new asset management company, Manulife
Asset Management (Taiwan) Ltd. ING Groep (Netherlands) closed the sale of its
Taiwanese life insurance business to Fubon Financial Holding. Prudential
(U.K.) sold its Taiwan operations to China Life, retaining a 9.95 percent
stake. AEGON (Netherlands) sold its Taiwanese life insurance business to
Zhongwei Company. The government operated Taiwan Insurance Guarantee Fund (TIGF)
took control of beleaguered Kuo Hua Life for a nine month rehabilitation
program.
* Vietnam.
Prudential Vietnam Assurance, the Vietnamese life insurance operation of
Prudential (U.K.), inked new bancassurance alliances and launched new products
to solidify its position in the country. Regulators granted Generali (Italy) a
license to open a representative office in Hanoi.
So what’s the outlook for life
insurance? There will be no quick recovery, says SwissRe.
The markets that will be most
affected in the short term are those where the volume of single premium
unit-linked business is large in proportion to total in-force business. Credit
spreads are expected to tighten and stock markets should recover. However, the
low interest rate environment and expectations of rising rates on government
bonds will drag on investment results. Nevertheless, the situation of life
insurers will substantially improve due to improving investment results. New
business volume is expected to recover in 2010.
The long-term prospects remain
favorable. For starters, the demand for protection products will continue to
rise in the emerging markets alongside the growing middle classes. In addition,
the average age of the world population continues to rise, which will increase
the importance of private solutions for pension, disability, critical illness
and long-term care products.
Resource,
as always, will keep you apprised of developments as they unfold.
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