Top 30 European Insurers 2017 Ranking: A mixed year for insurers

AM Best’s European ranking of the 30 largest European insurers according to non-life gross written premium, published for the third year by Post, analyses the main drivers behind movements in market positions and the financial performance of non-life insurers. It does not include life or health insurers and pension provision companies, and excludes groups that are solely focused on reinsurance. However, it does include insurers that write reinsurance if it is not their primary focus.

While all the insurers included in the ranking are headquartered in Europe, typically they are multinational participants with international books of business. In order to provide a consistent benchmark for comparison, AM Best has assessed their premiums and earnings in euros. The data is based on the companies’ published financial reports and accounts. Figures for GWP correspond to the non-life segment only, whereas profit after tax refers to the whole group.

Several movements in the ranking are the result of small changes in GWP. This has seen, for example, Mapfre (+1.5%, 8th) swapping places with Achmea (-1.5%, 9th).

A similar trend can be observed for Société de Groupe d’Assurance Mutuelle Covéa (+0.7%, 10th) and Aviva (-4.5%, 11th). The latter, like a number of companies based in the UK, actually reported an increase in GWP in sterling, which was more than offset by the effect of adverse exchange rate movements.

In addition to Aviva, insurance groups heavily affected by the depreciation of sterling included RSA Insurance Group (-9.4%, 12th), AIG Europe (-15.5%, 17th), Direct Line Insurance Group (-10.6%, 23rd) and QBE European Operations (-9.7%, 26th). RSA and Direct Line, however, retained their positions compared to the previous year. AIG Europe and QBE moved down one and two places respectively.

In terms of GWP growth, the most significant increases have been posted by Chubb (+10.7%, 5th) after accounting for the impact of its merger, R and V (+7.5%, 14th), Vienna Insurance Group (+5.9%, 18th), Grupo Catalana Occidente (+14.6%, 27th) and Groupe des Assurances du Crédit Mutuel (+9.8%, 29th). For Chubb and VIG, despite the material increase in premiums in percentage terms, their positions remained unchanged. R and V, Grupo Catalana Occidente and Crédit Mutuel strengthened their positions in their domestic markets through organic growth in traditional personal lines, namely motor and home insurance, increasing their rankings by three, two and three places respectively.

Both Crédit Mutuel and Bâloise-Holding were included in the ranking for the first time this year.

Changes in GWP – mixed fortunes

AM Best notes that the European insurance market is becoming more challenging and concentrated. A few companies are expanding profitably, whereas others are losing premium and –  more importantly – a larger share of their profits.

In total, premiums for the 30 largest European insurers were virtually flat, increasing by a modest 0.3% in 2016 from €377.2bn to €378.3bn. While these insurers have overall reported top line stability, a decrease in PAT of 5.7% from €39.2bn to €37bn demonstrates challenges to technical margins.

The share of GWP of the five largest (compared to the total for the biggest 30) has only increased marginally (49.5% versus 48.9%), but these companies are showing a better ability to maintain profitability, with their share of profits climbing from 55.8% to 62.5%. Of particular note is Zurich Insurance Group, which despite a slight reduction in written business (-0.5%) has shown a material improvement in profitability (+76.2%).  Within this group, both Chubb and Lloyd’s show a decrease in profits.

In the case of Lloyd’s in particular, its positive results reported in sterling have been more than offset by adverse currency movements.

The modest decline in Zurich’s premium volumes is a result of a re-pricing and pruning of its insurance portfolio. In particular, the company’s whole book of non-life business has generated improved technical results. Zurich has been targeting a reduction in combined operating ratios, following a COR in excess of 100% in 2015 as a result of some large losses – including those related to the Tianjin disaster – and an underperforming general insurance segment. In 2016, its COR was 98.4%, and going forward the company is aiming for a target of between 95% to 96%.

Currency fluctuations have been a key issue for Lloyd’s. In sterling terms, GWP actually increased from £26.7bn to £29.9bn, despite pressures on premium rates and underwriting margins. The 3.7% drop in GWP in 2016 was due to the weakening of sterling (which fell almost 17% during the year). Pre-tax profits for Lloyd’s were flat at £2.1bn (despite the higher premium volumes), or down 14.6% when translated into euros. Major claims in 2016 reached £2.1bn (three times the previous year’s figure, due to Hurricane Matthew and the Fort McMurray Wildfire in Canada).

AM Best notes that in the sample of 30 European insurers, there have been 10 declines in GWP, out of which five have posted falls of more than 5%. There have been 13 increases in GWP, out of which seven have recorded rises of more than 5%. The remaining seven companies have displayed very small movements, of less than 1% in either direction.

Struggle with profitability

Changes in PAT have been much more volatile, with exactly half of insurers showing declines in excess of 5%, out of which 10 companies declined by amounts greater than 25%. There were eight increases of PAT of more than 5%, of which only two companies recorded increases in excess of 25%. Out of the 30 biggest insurers, six saw PAT changes of very small movements (less than 5% in either direction) and VIG was the only one that recovered from a loss position in the previous year.

In general, the changes in profits have been much more amplified than movements in business volumes. Premiums are easier to control, but profits are typically of a smaller magnitude, so percentages tend to fluctuate more and appear more volatile. Extreme examples where there has been a fall in premiums and a sharper deterioration in profitability are Achmea (GWP -1.5%, PAT -199%), Ergo (GWP -3.5%, PAT -251%) and AIG Europe (GWP -15.5%, PAT -152.5%). This trend can also be seen for increases in profitability, although the changes in GWP are much less pronounced, such as HDI (GWP +1.1%, PAT +10.3%) and Crédit Agricole Assurances (GWP +5.3%, PAT +32.1%).

AM Best’s data also shows a few cases where GWP and PAT have moved in the opposite direction. In these cases, changes in GWP are minimal. Examples are Zurich (GWP -0.5%, PAT +76.2%), Ageas (GWP +1.0%, PAT-76.3%), Covéa (GWP +0.7%, PAT-28.4%) and Groupama (GWP +0.3%, PAT-12.0%). While Zurich’s results are in line with management actions aimed at restructuring its insurance book, those of the other groups mentioned above are mainly driven by either one-offs or unusually large claims (flood-related losses in France, the impact of rates used to calculate reserving for personal injury claims in the UK, and the Fortis settlement provision, in the case of Ageas).

Ergo Versicherungsgruppe stands out as it was impacted by significant costs related to its strategy programme announced in June 2016. The insurer has committed to significant investments in its online digitalisation platform and material reduction of its direct sales force. The company has faced pressures on the profitability of its life business due to the low interest rate environment. It has also encountered a decline in life and health premiums, as well as for its international business.

Achmea’s losses have been a result of a number of one-offs and extraordinary claims from hailstorms in June 2016, affecting more than 30,000 policyholders.

In 2016, it completed a three-year restructuring programme, involving cost reductions such as staff redundancies. The Dutch insurer unveiled further restructuring measures in 2016, including reserve strengthening and goodwill write-offs in respect of its Turkish operations.

A key issue for insurers has been the decision by the UK’s Ministry of Justice to make a dramatic cut in the discount rate used to calculate lump-sum personal injury compensation (from 2.5% to minus 0.75%). As yields on UK gilts had fallen sharply since 2001 – when the rate was previously set – most insurers had anticipated a reduction in the discount rate to between 0.0% and 1.5%.

The change took effect on 20 March 2017 and insurers exposed to UK liability business have reported sizable one-off reserve charges in recent results, with motor insurers the most severely hit. Many insurers have announced reserve increases in their 2016 results. Companies impacted materially by the discount rate change have included AIG, Ageas and Aviva.

In the case of Aviva, the decline in its financial results is largely due to the UK discount rate impact, which triggered a charge to its international financial reporting standards PAT of approximately £385m. The surge in its COR to 106.3% (compared to 95.0% in 2015) was mainly attributable to this legal change. Without it, the company’s COR would have been 94.9%. RSA’s net impact of £40m was not reflected in the 2016 results, but only in the 2017 first quarter numbers. The decline in profits in 2016 is not related to the measures relating to the discount rate change, but to the disposal of legacy businesses.

AIG Europe’s total GWP in reported currency actually increased from £4.68bn to £4.95bn, but this has been offset by the depreciation of sterling against the euro. Net premium written increases were shown in liability and financial lines, as well as personal insurance, although NPW for property and special risks declined. AIG’s liability reserves were strengthened as a result of changes to the discount rate and the accident year result was also impacted by prior year development and higher levels of severe claims within both property and special risks, as well as liability and financial lines. These elements, together with lower levels of investment returns, resulted in a pre-tax loss.

From a technical standpoint, all of Ageas’ operations performed positively, with the exception of the UK, which had a COR of 106% – well in excess of other regions. Its UK operations were impacted by one-off charges from reserve strengthening and restructuring costs. Ageas also made a settlement provision of €894m related to compensation to investors affected by its acquisition (under its previous name, Fortis) of ABN AMRO in 2007.

Covéa’s premium volumes were stable, although the French mutual was disproportionately impacted by natural catastrophe events, notably French floods in May and June. This resulted in a gross impact of €437m for the whole group. The net effect (after reinsurance recoveries and the use of equalisation provisions) was €304m.

Growth drivers for VIG have been Central and Eastern Europe, with growth in motor third-party liability and other property business. The company enjoyed a stable, profitable COR at 97.3% for 2016. Countries driving profitability have been Austria, the Czech Republic and Slovakia. Growth initiatives have been seen in health, reinsurance and in the Erste Group, VIG’s bancassurance operation in Eastern Europe.

Groupama has experienced stable business volumes. Technical results were impacted by a higher rate of claims due to weather and severe losses, with a non-life combined ratio of 100.3%

A host of issues

With the prolonged low interest rate environment, and a period of reserve strengthening following changes to the UK discount rates after the Ogden table review, AM Best has observed that the more stable companies are attempting to protect their balance sheets. They are adopting a relatively cautious approach by not expanding too quickly, and they are also trying to deploy their capital in more efficient ways.

Regarding Brexit, the cost implications of continuing to access European Union business and any resultant downturn in the UK economy are likely to weigh on insurers.
Uncertainty regarding the UK’s economy as a result of Brexit could have a negative impact on domestic insurers’ premium volumes. EU-based insurance groups will also have to factor in the impact that any of their UK businesses may have on consolidated results given the weakening pound.