Europe's Insurers Take Cover

The stock slump is just one of the woes hitting the industry

Mounting losses, tumbling credit ratings, dwindling reserves, slashed dividends. Things are going from bad to worse for European insurance companies.

Wounded by the worst stock market slump since the 1930s and the lowest interest rates in a generation, Old World underwriters are struggling to keep their heads above water. The total value of their investment portfolios has slumped by more than $150 billion in the past 12 months. Many, such as France's AXA Group (AXA ), have seen their reserves shrink by two-thirds or more in just two years. "Each of these elements alone would have a severe impact on our industry," says James J. Schiro, chief executive of Zurich Financial Services. "Together they amount to what some term 'the perfect storm."' ZFS has certainly felt the pain. On Feb. 27, the Swiss company reported a record loss for 2002 of $3.4 billion.

Such breathtaking deficits have policyholders all over Europe wondering whether their life, casualty, and savings policies are safe. They should be worrying: While no underwriter is threatened with bankruptcy, many are busy cutting payouts to customers and shareholders alike. Take Britain's Legal & General Group PLC. Although still regarded as one of Europe's strongest insurers, L&G has twice in the past six months had to cut payouts to clients with endowment policies -- savings plans linked to market performance that pay a lump sum after a period of years. A saver holding a typical 25-year, $80-a-month policy that matured on Mar. 1 got just $94,475 instead of the $117,706 he would have received last October. Meanwhile, Swiss Re cut its dividend for the first time since the San Francisco earthquake of 1906. AXA slashed its payment to shareholders, despite reporting profits of $1 billion for 2002. Chief Executive Henri de Castries says AXA took the action to preserve its capital. "The sudden shift in the financial markets has necessitated an equally radical response," says de Castries.

Depressed markets are only one of the insurers' problems. Many of the acquisitions they made in the go-go days of the 1990s have turned into costly disasters. Take Allianz' $22.5 billion purchase of Dresdner Bank in 2001. The move was meant to transform the Munich underwriter into a "bancassurance" powerhouse that would produce big revenues by selling insurance and banking products to the same customers. Instead, Dresdner has been a money-losing nightmare that has dragged Allianz (AZ ) deep into the red and cost Chief Executive Henning Schulte-Noelle his job.

Schulte-Noelle is not the only senior exec to fall victim to the industry's woes. Last month, Lars Ramqvist resigned as chairman of troubled Swedish insurer Skandia. Its foray into the crowded U.S. market lost it hundreds of millions of dollars. "Lars had to go as a result," says a board member.

While no one expects a leading insurer to go belly-up, some smaller underwriters, particularly in Germany, could be forced into mergers with larger, better-capitalized rivals. Even the best-positioned companies could attract predators. Italy's Assicurazioni Generali, which has avoided the costly strategic mistakes made by many of its peers in recent years (box), may fall victim to a takeover bid by a consortium of French investors allied with Milanese investment bank Mediobanca.

Amid the turmoil, insurers are desperately ditching noncore subsidiaries, leaving unprofitable businesses, cutting costs, and bolstering reserves through rights issues. Skandia recently sold its U.S. operation to Prudential Financial Inc. (PRU ) for $1.15 billion -- $600 million less than its book value. Allianz is streamlining Dresdner Bank. ZFS has shuttered Zurich Bank's operations in Britain, sold Rud Blass Bank in Zurich, and withdrawn from most small markets in Northern and Central Europe.

Insurers are being helped by firmer conditions in the property-casualty and other nonlife markets. But they are being hurt by European consumers' increasing reluctance to buy savings products linked to equities. In several countries, carriers are being squeezed by regulations guaranteeing minimum returns to whole-life insurance policyholders. In Switzerland, for example, insurers are required to pay 3.25%. That's 110 basis points more than the current return on 10-year Swiss government bonds. Insurers are calling for change. "The guarantee should either be abolished or closely linked to the [government bond] rate," says Schiro.

But the biggest drag on the industry remains the sad state of the capital markets. Economists see little chance of a rise in interest rates, which means insurers' returns on the investment-grade bonds they hold will remain minimal. More worrying: The equity markets could deteriorate further, especially if the current standoff with Iraq isn't resolved quickly. "The question is whether the current situation will get worse," says AXA's de Castries. "Will it get to be a Japanese situation where stock markets decline for 15 years and interest rates stay low? I hope not." So do the insurance companies' hard-pressed customers and shareholders.

By David Fairlamb in Frankfurt

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