THE TOP 10 GLOBAL INSURANCE COMPANIES

Transcription

1 THE TOP 10 GLOBAL INSURANCE COMPANIES

2 FINANCE THE TOP 10 GLOBAL INSURANCE COMPANIES Increasing profitability, market share and competitive edge By Barbara Kubis-Labiak

3 Barbara Kubis-Labiak Barbara has a BA (Hons) in Business and Management and is currently at the end of her MSc in International Finance degree. Barbara started her career working as an intern for the European Commission in Brussels, and then in 1999 she joined Datamonitor Financial Services department as an analyst. Barbara's work at Datamonitor involved various projects and reports, including the FinTab project, where she helped to develop an online data resource covering the insurance, banking, investments and payment cards sectors. Barbara also authored a number of reports: Retirement Provision in Germany , Retirement Provision in Germany 2002, European Mutual Funds 2001, UK Wealth Management, Distribution of life insurance and pensions in Europe 2002 and Central and Eastern European Life and Pensions 2002, as well as consultancy projects, for example Motor insurance distribution in central Europe, Competitors in occupational pensions in Germany, Bausparkassen in Germany and many others. Copyright 2004 Business Insights Ltd This Management Report is published by Business Insights Ltd. All rights reserved. Reproduction or redistribution of this Management Report in any form for any purpose is expressly prohibited without the prior consent of Business Insights Ltd. The views expressed in this Management Report are those of the publisher, not of Business Insights. Business Insights Ltd accepts no liability for the accuracy or completeness of the information, advice or comment contained in this Management Report nor for any actions taken in reliance thereon. While information, advice or comment is believed to be correct at the time of publication, no responsibility can be accepted by Business Insights Ltd for its completeness or accuracy. Printed and bound in Great Britain by MBA Group Limited, MBA House, Garman Road, London N17 0HW. ii

4 Table of Contents The Top 10 Global Insurance Companies Increasing profitability, market share and competitive edge Executive Summary 10 The global insurance market overview 10 The top 10 global insurers: company analysis 11 Chapter 1 Introduction 16 Report structure 16 Global insurance overview 16 Introducing the top 10 global insurance companies 16 Chapter 2 Global Insurance Overview 20 Summary 20 Introduction 20 Life and non-life insurance markets worldwide 21 Definitions 21 European life bancassurance overview 27 Unit linked policies 29 Opportunities in European bancassurance 30 Regulations 31 Chapter 3 Allianz AG 34 Summary 34 Overview 34 History 35 SWOT analysis 37 Strengths 37 iii

5 Weaknesses 38 Opportunities 38 Threats 39 Company activity snapshot 40 Chapter 4 Axa 44 Summary 44 Overview 44 History 46 SWOT analysis 47 Strengths 47 Weaknesses 48 Opportunities 48 Threats 48 Company activity snapshot 49 Chapter 5 American International Group, Inc. 54 Summary 54 Overview 54 History 55 SWOT analysis 57 Strengths 57 Weaknesses 58 Opportunities 59 Threats 60 Chapter 6 Assicurazioni Generali S.p.A. 62 Summary 62 Overview 62 History 63 SWOT analysis 65 Strengths 65 Weaknesses 66 Opportunities 67 Threats 68 iv

6 Company activity snapshot 68 Chapter 7 ING Groep N.V. 70 Summary 70 Overview 70 History 71 SWOT analysis 73 Strengths 74 Weaknesses 74 Opportunities 75 Threats 76 Company activity snapshot 76 Chapter 8 Nippon Life Insurance Company 80 Summary 80 Overview 80 History 82 SWOT analysis 83 Strengths 83 Weaknesses 84 Opportunities 85 Threats 86 Company activity snapshot 86 Chapter 9 State Farm Insurance Companies 90 Summary 90 Overview 90 History 91 SWOT analysis 93 Strengths 93 Weaknesses 94 Opportunities 95 Threats 96 Company activity snapshot 97 v

7 Chapter 10 Aviva Plc 100 Summary 100 Overview 100 History 101 SWOT analysis 102 Strengths 103 Weaknesses 103 Opportunities 104 Threats 105 Company activity snapshot 105 Chapter 11 Zurich Financial Services 108 Summary 108 Overview 108 History 109 SWOT analysis 111 Strengths 111 Weaknesses 112 Opportunities 112 Threats 112 Company activity snapshot 113 Chapter 12 The Dai-ichi Mutual Life Insurance Company 116 Summary 116 Overview 116 History 117 SWOT analysis 118 Strengths 118 Weaknesses 119 Opportunities 120 Threats 120 Company news 121 vi

8 Chapter 13 Report Conclusions 123 Summary 123 Global insurance industry recovers 123 Japanese stagnation 124 China, the land of potential 125 Stricter regulations 126 Bancassurance 126 Chapter 14 Appendix 129 Definitions of distribution channels 129 Index 130 List of Figures Figure 1.1: Total life and non-life premium volume in the top five European markets, Figure 2.2: Stock market indices in major stock markets in Europe, Figure 2.3: Total life insurance premium volume in the top five European countries, Figure 3.4: SWOT analysis of Allianz 37 Figure 4.5: SWOT analysis of Axa 47 Figure 5.6: SWOT analysis of AIG 57 Figure 6.7: SWOT analysis of Generali 65 Figure 7.8: SWOT analysis of ING Groep 73 Figure 8.9: SWOT analysis of Nippon Life Insurance Company 83 Figure 9.10: SWOT analysis of State Farm Insurance 93 Figure 10.11: SWOT analysis of Aviva 102 Figure 11.12: SWOT analysis of Zurich 111 Figure 12.13: SWOT analysis of Dai-Ichi 118 List of Tables Table 1.1: Top 10 global insurance companies, by premium income in Table 2.2: Total premium insurance volume by country and region, Table 2.3: Life insurance premium volumes by country and region, Table 2.4: Non-life insurance premium volumes by country and region, Table 2.5: Distribution of life assurance by distribution channel, vii

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10 Executive Summary 9

11 Executive Summary The global insurance market overview 2003 saw some signs of recovery after two years of worldwide recession and growth rates are gradually picking up. The world insurance premium volumes, after a drop from $2,444,903 in 2000 to $2,408,252 in 2001, are now growing at a steady pace, and reached $2,940,670 in 2003, experiencing a compound annual growth rate of 6.3% in the period 2000 and Figure 1.1: Total life and non-life premium volume in the top five European markets, Total premium volume, mln m 250, , , ,000 50, UK Germany France Italy Netherlands Source: Swiss Re, sigma No. 3/2004 Business Insights 10

12 Life insurance premiums have experienced a very slow growth after the decrease in premium income in In many countries 2003 saw a further decrease in premium income, for example in the UK. The compound annual growth rate for non-life insurance in Europe between 2000 and 2003 totalled 15.6%, compared with only 5.1% for life insurance during the same period. Only one country, Germany, experienced a negative growth during this period. Bancassurance has been particularly successful in France, Italy and Spain. Banks in these countries enjoy more than 50% of the distribution of life assurance products. In Italy, for example, bancassurance accounted for 56% of the distribution of life assurance products, with five of the top 10 life assurance competitors in the market owned by Italian banks. Depolarisation would encourage a competitive advantage for banks holding in the UK. This would allow non-independent institutions to offer life and pensions products from more than one provider, coupled with the introduction of simpler products. The top 10 global insurers: company analysis Nippon Life, based in Osaka, Japan, is both the largest provider of life insurance in Japan and one of the world's largest insurance companies in terms of total assets and policies in force. The company's core business is life insurance. Products and services within this area are made available to both individual and corporate/group clients. The company also offers non-life products and such cover as medical treatment and long-term care, as well as asset management/asset formation products. For the fiscal year ended December 2003, ING s company's revenues (including both insurance and banking operations) were 64,913 million, compared to 70,650from the previous year. Operating net profit amounted to 4,053 million, an 11

13 18.1% increase compared with Banking profits were up by 72.6%, which compensated for the somewhat weaker performance of insurance activities. Allianz is hoping its latest 'New Dresdner' program will see the bank earn its cost of capital again in 2005.Consistent bad news from the Dresdner investment banking arm has blemished the organisation's reputation. Harsh cost cutting tactics have been operating for two years now and Dresdner still has not managed to return to profitability. State Farm Insurance is a personal lines property/casualty company that provides auto insurance, non-medical health, life, and homeowners insurance. The company has various subsidiaries across the United States that sell all types of insurance. It also operates State Farm Bank, which provides additional financial services. State Farm Insurance is headquartered in Bloomington, Illinois. Axa capitalises on its core strengths: over 50 million clients worldwide; a 44,000- strong captive distribution force; a global brand; unique product skills in areas such as insurance underwriting, long-term investments, and financial advice, all on a scale that enables Axa to leverage best practices and operations platforms across the group. Assicurazioni Generali has one of the strongest balance sheets in the sector and boasts 1.7 billion in excess capital. The low level of equity exposure, limited exposure to asset management and commercial banking and no direct exposure to the United States or Japan gives it a very stable outlook in the current environment, where there is a clear correlation between capital adequacy and share price performance. While half of its business comes from the UK, it has presence in France, the Netherlands, Spain, Italy, Ireland, Canada and Australia. Aviva operates through its subsidiaries under names such as Aviva, CGNU, Norwich Union, CGU, Morley Fund Management and Delta Lloyd. It has 30 million customers. 12

14 For the fiscal year ended March 2004, the Dai-ichi Mutual Life Insurance Company achieved revenues that totalled 5,090.4 billion ($46,990 million) a decrease of 4% against the previous years revenues that were 5,255.9 billion ($47,565 billion). Reduced insurance premiums and lower revenues from group pensions were some of the key reasons behind the fall in overall revenues. Zurich benefits from the considerable scale of its operations. It maintains a presence in 60 countries globally, and a strong focus on the key markets of the UK, U.S. and Switzerland, with expanding operations in continental Europe. It is the UK's third largest household insurer in terms of gross earned premiums. It also has 2,000 financial planning businesses in the UK, through the Zurich Advice Network. This is also one of the country's largest mortgage introducers. In total it has around 38 million customers. For fiscal 2003 AIG's revenues were $81.3 billion, an increase of 20.5% on the previous year's results of $67.4 billion. The company achieved operating revenues that totalled $15,805 million, a 47.5% increase on the previous year s total of $10,712 million. 13

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16 Chapter 1 Introduction 15

17 Chapter 1 Introduction Report structure Global insurance overview This chapter provides a general overview of the trends in the global insurance industry and presents data on global insurance for the period , based on the Swiss Re sigma economic research. The sigma publication series provides comprehensive information on the international insurance markets and in-depth analyses of economic trends and strategic issues in insurance, reinsurance and financial services, covering life and non-life business. It is considered to be one of the most reliable and comprehensive sources of information about insurance industry. This report uses the World Insurance Series published regularly by Swiss Re sigma research with independent expert analysis. The second half of the chapter addresses an important issue within the insurance industry, namely bancassurance with statistics on the distribution of life insurance in Europe. Introducing the top 10 global insurance companies The chapters that follow have been written in a similar format, providing comprehensive information on each of the top 10 global insurers. Each chapter includes an overview of the company s main activities, its history, comprehensive SWOT analysis and analysis of the current company status. The companies profiled in this report are: 1. Allianz AG 2. Axa 3. American International Group, Inc. 4. Assicurazioni Generali S.p.A. 5. ING Groep N.V. 16

18 6. Nippon Life Insurance Company 7. State Farm Insurance Companies 8. Aviva Plc 9. Zurich Financial Services 10. The Dai-ichi Mutual Life Insurance Company These companies are considered to be the largest and most important insurers globally. The main purpose for presenting these companies in this report is to show the examples of best practice among insurers, analysing the reasons behind the growth of these businesses, and indicating any potential problems they might be facing. In this way, these profiles serve as examples for other insurers of what strategies to implement in order to expand their businesses and achieve higher profitability. One of the important characteristics of most of these profiles (as shown in the table below) is the decrease in revenues in 2002 to 2003 due to the global recession. This aspect of insurance business is analysed within the profiles, in most cases indicating that there are signs of recovery among global insurers. The table is in order of 2003 revenues, with Allianz taking the number one position with a premium income of $113,319 in Table 1.1: Top 10 global insurance companies, by premium income in US$million Allianz AG 111, , Axa 84,791 82, American International Group, Inc. 67,400 81, Assicurazioni Generali S.p.A. 77,412 79, ING Groep N.V. 71,707 64, Nippon Life Insurance Company 72,224 62, State Farm Insurance Companies 49,699 56, Aviva Plc 50,843 52, Zurich Financial Services 41,423 48, The Dai-ichi Mutual Life Insurance Company (year end in March) 47,565 46,990 Source: Annual report analysis Business Insights 17

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20 Chapter 2 Global Insurance Overview 19

21 Chapter 2 Global Insurance Overview Summary The year 2003 has shown some signs of recovery after two years of worldwide recession and growth rates are gradually picking up. The world insurance premium volumes, after a drop from $2,444,903 in 2000 to $2,408,252 in 2001, are now growing at a steady pace, and reached $2,940,670 in 2003, experiencing a compound annual growth rate of 6.3% in the period 2000 and Life insurance premiums have experienced very slow growth after the decrease in premium income in In many cases 2003 saw a further decrease in premium income, for example in the UK. The compound annual growth rate for non-life insurance in Europe between 2000 and 2003 totalled 15.6%, compared with only 5.1% for life insurance during the same period. Only one country, Germany, experienced a negative growth during this period. Bancassurance has been particularly successful in France, Italy and Spain. Banks in these countries enjoy more than 50% of the distribution of life assurance products. In Italy, for example, bancassurance accounted for 56% of the distribution of life assurance products, with five of the top 10 life assurance competitors in the market owned by Italian banks. Depolarisation in the UK that will allow non-independent institutions to offer life and pensions products of more than ones provider, coupled with the introduction of more and more simple products will offer a competitive advantage to banks. Introduction Considering Figure 2.2, it is clear that between 2000 and 2002 there was a rapid decline in stock market growth worldwide. Such falls of course meant that investors saw their assets decrease in value. For example, the German index, the DAX, suffered the most, 20

22 falling by 58.4% in the period and the average fall across the five countries indices was 44.9%. The Spanish General Index comparatively performed the best, falling 37.1% in the period , however, showed some signs of recovery, something that all investors have been looking forward to. After two years of worldwide recession growth rates are gradually picking up. Figure 2.2: Stock market indices in major stock markets in Europe, Source: Euroland stockmarket indices Business Insights Life and non-life insurance markets worldwide Definitions The most important terms used in this chapter are as follows: Direct insurance: insurance contract between an individual (or a company) and an insurer; total insurance: direct insurance premiums plus reinsurance accepted; gross insurance: insurance premiums before ceding any portion of them (and their risks) in reinsurance; 21

23 net insurance: insurance premiums after ceding some risk to reinsurers; written premiums: premium income allocated to the current accounting year, regardless of when the risk (or the contract) runs to, or whether the risk continues into the next accounting year; earned premiums: the portion of premium income that corresponds to the current accounting year. Premium income is spread over the duration of the contract. This chapter also distinguishes between life insurance and non-life insurance. Life insurance: risk insurance intended as protection against the financial consequences of the death of the insured person which takes the form of payment of a previously agreed lump sum or pension to a beneficiary, if the insured person dies during the term of insurance. In the case of pure life insurance, without any endowment insurance component, no payments are due if the insured person survives the term of insurance i. Non-life insurance: covers all other types of insurance, including motor insurance, property and casualty, liability insurance, credit insurance, health and accident insurance (although some countries classify health and accident insurance as life insurance ), and other. The world insurance premiums, after a drop from $2,444,903 in 2000 to $2,408,252 in 2001, are now growing at a steady pace, and have reached $2,940,670 in 2003, experiencing a compound annual growth rate of 6.3% in the period 2000 and It is i Swisslife definition 22

24 evident that the declines in stock markets worldwide had a direct impact on world insurance premiums, resulting in either a decrease in premiums or a sluggish growth. Table 2.2: Total premium insurance volume by country and region, Euros CAGR UK 232, , , , % Germany 134, , , , % France 131, , , , % Italy 68,436 77,627 89,260 98, % Netherlands 39,981 43,495 42,218 44, % Spain 37,635 39,392 48,214 41, % Belgium 21,597 22,934 25,354 29, % Sweden 18,130 17,406 17,239 18,703 1% Ireland 17,065 12,116 13,604 15, % Denmark 11,229 12,499 13,809 14, % Finland 12,128 12,019 12,345 12, % Norway 7,854 8,175 7,917 11, % Portugal 6,860 7,931 8,491 9, % Total of above 738, , , ,009 3% US$ United States 859, ,021 1,005,985 1,055, % Europe 786, , ,697 1,022, % Japan 503, , , , % Africa 27,145 24,551 24,805 30, % World 2,444,903 2,408,252 2,632,473 2,940, % Note: The values in Euro for UK, Sweden, Denmark and Norway are converted from local currency into Euro, based on end of year 2003 exchange rate Source: Swiss Re, sigma No. 3/2004 (year 2000 from sigma No. 6/2002) Business Insights 23

25 Figure 2.3: Total life insurance premium volume in the top five European countries, Total premium volume, mln m 250, , , ,000 50, UK Germany France Italy Netherlands Source: Swiss Re, sigma No. 3/2004 Business Insights Life insurance premiums have experienced a very slow growth after the decrease in premium income in In many cases the year 2003 saw a further decrease in premium income, for example, in the UK. This trend is not only because of the recession of 2001, but also due to the persistent low interest rates resulting in life insurers offering lower returns. Such trends have been observed in the traditional life insurance sector, as well as in unit-linked insurance. According to Swiss Re Economic Research & Consulting data, unit linked insurance experienced negative real growth rate between 2001 and 2003 in France and Spain, and the UK and Italy saw a very slight increase in

26 Table 2.3: Life insurance premium volumes by country and region, Euro CAGR UK 175, , , , % France 90,216 84,507 85,278 92,985 1% Germany 61,051 62,162 64,625 67, % Italy 39,805 46,619 55,688 63, % Netherlands 23,437 25,511 22,131 22, % Belgium 12,965 13,435 14,736 18, % Spain 23,767 20,362 26,482 17, % Sweden 13,693 12,645 11,774 12, % Finland 9,786 9,510 9,737 9, % Denmark 7,094 8,139 8,873 9, % Ireland 13,243 6,987 7,246 7, % Portugal 3,172 4,231 4,467 5, % Norway 3,471 4,240 4,701 5, % Total of above 560, , , , % US$ US 436, , , , % Europe 503, , , , % Japan 400, , , , % Africa 20,482 18,267 18,087 22, % World 1,518,401 1,439,177 1,534,061 1,672, % Note: The values in Euro for UK, Sweden, Denmark and Norway are converted from local currency into Euro, based on end of year 2003 exchange rate Source: Swiss Re, sigma No. 3/2004 (year 2000 from sigma No. 6/2002) Business Insights The above table analyses the life insurance premium volumes worldwide, demonstrating that some countries recorded negative compound annual growth rate in the period , including the UK, Netherlands, Spain, Sweden, Finland and Ireland. The highest growth rate was recorded in Portugal, with 19.4% compounded annually between 2000 and 2003, followed by Italy with 16.7% and 13.9% for Norway. Worldwide, Europe achieved a better growth than the rest of the world, with 5.1% compounded annually between 2000 and 2003, compared with 3.3% for the United States and 3.3% worldwide. The non-life insurance sector experienced a much stronger growth than the life insurance sector between 2000 and

27 Table 2.4: Non-life insurance premium volumes by country and region, Euro CAGR UK 56,703 97, , , % Germany 73,223 45,563 51,305 56, % France 40,976 44,098 47,605 51, % Italy 28,631 31,008 33,572 35, % Spain 13,867 19,031 21,732 23, % Netherlands 16,544 17,984 20,087 21, % Belgium 8,632 9,499 10,618 11, % Ireland 3,821 5,129 6,358 7, % Sweden 4,437 4,761 5,369 6, % Denmark 4,135 4,360 4,961 5, % Norway 4,383 3,935 4,320 4, % Portugal 3,687 3,700 4,024 4, % Finland 2,342 2,508 2,608 2, % Total of above 261, , , , % US$ US 423, , , , % Europe 282, , , , % Japan 102,719 89,114 92,031 97, % Africa 6,663 6,284 6,718 8, % World 926, ,074 1,098,412 1,268,157 11% Note: The values in Euro for UK, Sweden, Denmark and Norway are converted from local currency into Euro, based on end of year exchange rate Source: Swiss Re, sigma No. 3/2004 (year 2000 from sigma No. 6/2002) Business Insights Table 2.3 shows a different story to Table 2.4. The CAGR for non-life insurance in Europe between 2000 and 2003 totalled 15.6%, compared with only 5.1% for life insurance during the same period. Only one country, Germany, experienced negative growth. According to Swiss Re Economic Research & Consulting, the growth in non-life insurance was mainly driven by renewed premium rate increases. The strongest growing sector was the third party liability, due to the higher claims payouts and subsequent increases in the amount of premiums charged. 26

28 European life bancassurance overview Life bancassurance is taken to mean several things: Distribution partnerships, whereby a bank agrees to sell the products of a life assurance provider through its branches, or; bank-owned life assurers, where the bank distributes the life assurance products of its life subsidiary; or life assurer owned banks, where the parent life assurer distributes its products through its banking arm. The distribution of life assurance products through the banking channel has been a successful model in the European markets studied (including France, Germany, Italy, Spain and the UK), with examples of each of the above models present in each country. For example, Lloyds TSB in the UK owns Scottish Widows, the life and pensions provider, distributing its products through the Lloyds TSB branches. In Germany, Allianz owns the German bank Dresdner and distributes its products through the bank s branches, while in Italy, Banca Unicredito has a partnership with the Italian life company RAS to distribute its products. Caja Madrid owns Caja Madrid Seguros Generales and also has a cross-shareholding agreement with Mapfre resulting in Mapfre Vida now being part of Caja Madrid Seguros Generales whilst Caja Madrid falls under Banco Mapfre. Whilst life bancassurance has been successful in France, Germany, Italy, Spain and the UK, the penetration of the bancassurance channel in these countries is not uniform. Across the five countries, the market share of life assurance distribution owned by the bancassurance channel ranges in size from 18% to 77%. 27

29 Table 2.5: Distribution of life assurance by distribution channel, 2002 Banks/ Tied Direct IFAs/ Other Bancassurers Agents salesforce Brokers Spain 77% 0% 3% 20% 0% France 61% 8% 6% 9% 16% Italy 56% 34% 9% 1% 0% UK 18% 17% - 56% 9% Germany 19% 51% 9% 21% 0% * Estimated figures for Spain and Germany, ** Direct salesforce and tied agents counted together in the UK Source: Business Insights Business Insights Bancassurance has been particularly successful in France, Italy and Spain. Banks in these countries enjoy more than 50% of the distribution of life assurance products. In Italy, bancassurance accounted for 56% of the distribution of life assurance products, with five of the top 10 life assurance competitors in the market owned by Italian banks. In France, bancassurance has been even more successful, with the channel responsible for 61% of distribution. Of the top 10 bancassurance competitors in the French market, the French banks owned five in The most successful bancassurance market in Europe by far was Spain, where the banks have grown over the last decade to dominate the market with 77% market share. Prior to 1992, banks were not allowed to distribute life assurance products. By 2002, Spanish banks owned seven of the top 10 life assurance competitors. Whilst bancassurance has been very successful in the Latin countries, German and UK investors have resisted buying their life assurance products through bank branches. 28

30 Bancassurance in Germany has experienced the least success, sharing only 19% of the life assurance distribution market. Of the top 10 life competitors, the German banks owned two in The UK market is slightly more complex due to the dominance of the IFA channel in the distribution of retail life, pensions and investment products. Distribution figures show that banks have cornered only 17.7% of the life assurance distribution market. However, this does not mean that the banks have not taken an interest in life assurance; four of the top 10 competitors in the life assurance market are bank-owned. Lloyds TSB for example, distributes Scottish Widows life assurance products through its branches, but Scottish Widows also distributes its products through IFAs, the preferred channel for UK investors. Unit linked policies The mainstay of life bancassurance - unit linked policies - have suffered at the hands of world stockmarkets. Unit linked products such as endowment policies, which have two components - savings and life assurance - have no minimum income guaranteed, instead income is directly linked to the underlying fund in which money is invested. The endowment buys specific units in stock market-linked investments, which can go up and down in value daily. Because of the fact that unit-linked policies can take advantage of the stock market performance, they have the potential for greater and faster growth than other products such as with-profits endowments. However, as with any potential for greater return, there is also an increased risk that the unit-linked policy may produce much lower returns than a with-profits policy, in cases where the stock markets decline, as seen in years 2001 and Before the year 2001 unit-linked insurance policies were showing significant growth all over Europe, however the events of September 11, 2001, and the global recession that followed, saw the worldwide stock markets decline significantly, which meant that returns on unit-linked insurance fell beyond the contributions value (resulting in the value of the unit-linked policy being lower than the sum of the contributions invested). 29

31 Since the trust in equities has now been shaken, consumers are more reluctant to opt for products with an element of equity included. According to industry experts, since the memory of past events in finance is rather short, unit-linked products are likely to pick up again in the future. In the UK for example, sales of unit-linked life products have decreased dramatically in both endowments (savings) and whole life (protection). New business in endowment policies and whole life decreased by 31.2% and 20.6% over the period 2000 to 2002 compounded annually. Opportunities in European bancassurance The results of a survey of industry experts Bancassurance Opportunities in Europe (survey of 52 banks and life assurors across the UK, Germany, France, Spain and Italy conducted in 2003) concerning the issues of bancassurance in Europe indicated that the outlook for bancassurance was extremely positive with 81.6% of respondents believing there to be further opportunities. With 77% of life assurance premium income coming via the bancassurance channel, it would seem the opportunities for further dramatic growth in the Spanish market for life bancassurance are limited. However, 90% of respondents believe that there are still plenty more opportunities in the Spanish market. Respondents believed that these opportunities would open up for banks launching their own life companies rather than forming partnerships. The largest banks such as La Caixa and BBVA, which hold their own life assurers, were exemplified as the best bancassurance models in the Spanish market. Going forward, only 10% of respondents regarded the need for independent advice as a threat to the bancassurance model. However, more quality advice offered by the banks was seen as a key factor in the continued growth of the bancassurance channel. Whilst brokers and IFAs do not dominate, they do hold significant market share to influence the growth of life bancassurance and banks will need to be able to offer a rival advisory service. 30

32 The dynamic changes in the tax regimes across the various countries will increase the desire for advice. With more and more diverse products entering the European markets, each with its own tax advantages, the need for expert advice will become ever more important. Over recent years there have been changes and proposed changes that have both boosted and dampened growth in premium income in the life bancassurance arena. In Germany, proposed changes to the tax regulations on life assurance products in 1999 caused a surge in sales of endowment policies, with investors rushing to buy up policies before taxation was implemented. The effects of taxation on investor sentiment should not be underestimated. Regulations Depolarisation in the UK that will allow non-independent institutions to offer life and pensions products of more than ones provider, coupled with the introduction of more and more simple products will offer a competitive advantage to banks. UK banks will be able to capitalise on their large customer bases and distribution networks to sell more products and take market share away from the IFAs. Simpler products will reduce the need for investors to pay for advice through IFAs when advice on various products will be available on the high street through local bank branches. Retirement provision in Germany is undergoing significant changes after the Pension Reform was passed in May This created both opportunities and threats for those concerned, including the government, product providers and consumers. The German government is trying to shift the responsibility for pension provision away from the state and onto the individual. A new set of Riester life assurance and pensions products was created that can be sold by any institution, this could pave the way for banks to target existing customers who are concerned about their retirement provision, in turn enabling banks to capture a larger market share. 31

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34 Chapter 3 Allianz AG 33

35 Chapter 3 Allianz AG Summary Allianz Group is considered to be Europe s strongest and most profitable insurance company. Although the year 2002 was very disappointing for Allianz (not only because of the worldwide recession, but also due to the acquisition of troubled Dresdner Bank in 2001) the company reversed these figures in 2003 thanks to a positive restructuring program and a number of divestments. Allianz, headquartered in Munich, Germany, is one of the world's leading insurance and asset management companies, and it generated total group income of 93,900 million in 2003, up on the previous year from 92,600 million. Net income totalled 1,616 million in 2003, up from a loss of 1,229 million in At the end of 2002 Allianz reported a loss of more than 1.1 billion, which was over 150% down on the previous year s income. The share price of the company slumped from a high in 2001 of down to by the end of 2002 and only recovered slightly in Allianz showed signs of recovery with stronger results in 2003; however, it is still substantially below the levels of Overview Allianz, headquartered in Munich, Germany, is one of the world's leading insurance and asset management companies. The Allianz Group consists of around 700 subsidiaries in over 70 countries giving the company a global presence. The company's insurance operations comprise the core business of Allianz, including property and casualty insurance. Private and institutional clients are handled primarily through a nationwide network of full-time and part-time Allianz sales agents while the industrial risk insurance business is run through brokers and company-connected agents. Two thirds of the company's revenues are generated through its property and casualty insurance. The company is also venturing into alternative risk transfer and other avenues 34

36 to expand the company's scope of operations and it established Allianz Risk Transfer (ART) with headquarters in Zurich to develop financing solutions outside of the traditional insurance market for service-based, financial and industrial corporations. Private Provision encompasses life and health insurance, with products and services offered to the company's native Germany and the European market. The sector is designed to provide long-term financial income to clients. It also protects clients from premature consumption of capital. The company has engaged in a number of acquisitions to strengthen its position in the life and health insurance market outside of Germany. These acquisitions included the French company AGF, improving Allianz's coverage of the French market. The company also formed a joint venture between the President Group in Taiwan and Allianz First Life in South Korea, and also acquired LifeUSA. Allianz's largest health insurance provider is Vereinte Krankenversicherung AG. Allianz generated total group income of 93,900 million in 2003, up on the previous year from 92,600 million. Net income totalled 1,616 million in 2003, up from a loss of 1,229 million in History Allianz was founded as an insurance provider in Berlin in 1890, and floated on the Berlin stock exchange five years later. In 1984, it purchased a stake in its Italian subsidiary Riunione Adriatica di Sicurtà and this was followed two years later with a takeover of Cornhill Insurance. The Group moved into fourth position in the French life insurance market with the purchase of Assurances Générales de France in The company boosted its American presence with the purchases of Fireman's Fund Insurance Company in 1991 and LifeUSA in

37 LifeUSA has been merged with Allianz Life to exploit the synergies that the acquisition presented. A key to the company's growth strategy is expansion into emerging markets. This began in 1990 when the company bought the former state insurer of East Germany and then began to expand into the Eastern European market. In 1999, Allianz started to expand into the Asian market with its first targets being the Chinese and South Korean markets. In order to bolster this division, PIMCO advisors, a U.S. based company, was acquired in This increased Allianz's exposure to the world's largest capital market. In 2000, Allianz was listed on the New York Stock Exchange. In the same year, the company purchased the U.S. asset manager Nicholas-Applegate, San Diego, California. In March 2001, Allianz unveiled its most ambitious acquisition to date, Dresdner Bank. This deal creates one of the five biggest asset managers in the world and provides Allianz with exposure to the banking sector. In May 2004, the company announced that Allianz Capital Partners was to acquire Hansen Transmissions, a Belgian manufacturer of gearboxes for wind turbines, from Invensys plc. 36

38 SWOT analysis Figure 3.4: SWOT analysis of Allianz Strengths Weaknesses Strong non - life insurance division Expanded product and service offerings in Europe Recovery after losses in 2002 Acquisition of Dresdner Bank Decreasing profits Opportunities Threats Lead Dresdner to profitability Strengthen asset management position Becoming too diverse Competition from foreign insurers Source: Author analysis Business Insights Strengths Strong non-life insurance division: the property and casualty division has been growing fast and achieved profitability, mainly due to the strong growth in premium income. Expanded product and service offerings in Europe: as part of the measures for improving service quality for its customers, Allianz Bulgaria is now offering online services in the areas of life insurance and supplementary voluntary pension insurance through its company homepage at Allianz Bulgaria Life is now the only insurance company in the country that provides online calculators for estimating 37

39 premiums for future guaranteed annuities and the additional interest resulting from endowment insurance. Recovery after losses in 2002: Allianz Group is considered to be Europe s strongest and most profitable insurance company. Although the year 2002 was very disappointing for Allianz (not only because of the worldwide recession, but also due to the acquisition of troubled Dresdner Bank in 2001) the company reversed these figures in 2003 thanks to a positive restructuring program and a number of divestments. Weaknesses Acquisition of Dresdner bank: in 2001 Allianz acquired Dresdner Bank in order to expand its product offering into banking. However, this bancassurance deal was far from what Allianz had expected. Dresdner Bank has been having problems for some time, and this acquisition meant that instead of increasing profits, Allianz faced significant losses. The insurer had to start with radical cost reductions and Dresdner still has not managed to return to profitability. Dresdner has performed four cost-cutting programs in as many years, the most recent to further cut employees by 4,700 as well as IT expenditure by roughly 50%. The company is hoping its latest 'New Dresdner' program will see the bank earn its cost of capital again in Decreasing profits: at the end of 2002 Allianz reported a loss of more than 1.1 billion, which was over 150% down on the previous year s income. The share price of the company slumped from a high in 2001 of down to by the end of 2002 and only recovered slightly in Allianz showed signs of recovery with stronger results in 2003, however, it is still substantially below the levels of Opportunities Lead Dresdner to profitability: Allianz estimates that there is a potential in excess of 1 billion if Allianz and Dresdner Bank develop joint products. Despite problems with Dresdner, the extensive distribution network that came with the acquisition as well as 38

40 the fact that through this acquisition Allianz has entered the bancassurance market, means that in the future Allianz will profit from this deal. Strengthen asset management position: the asset management segment of Allianz is beginning to become integrated. It was composed of Pimco, the U.S. based fund manager, Allianz's asset management operations and Dresdner's asset management operations. When these groups fully integrate, strong cost savings should be realised, particularly in back office operations. In October 2002, Allianz became the first foreign entity allowed to operate in the Chinese Asset Management sector and now the company owns 33% in a joint venture with Guotai Junan Securities. Entering Asian markets, because of their strong growth, is a positive step, and especially China is an increasingly sought after location for investors. The fact that Allianz was able to enter the Chinese market so early, means that it already has an advantage over its competitors. Threats Becoming too diverse: many companies have been trying to achieve a perfect model of a financial conglomerate, able to serve all areas of financial services and in turn attract more clients and ensure loyalty of the existing ones. Allianz is working to achieve this aim, trying to follow the example of Citigroup and grow the business to represent all aspects of the financial services industry, for example adding non core industries, such as investment banking. The problem here is that investment banking has a highly different management structure and culture. The Allianz board was too keen to maintain the autonomous management strategy that it neglected to monitor the actions of Dresdner sufficiently and this is the main reason why Allianz had to pay for this mistake with the losses it incurred after the acquisition of Dresdner. Competition from foreign insurers: foreign insurance companies are currently trying to penetrate the German market, especially the personal motor market, where there is a threat from motor dealers and manufacturers, which are looking to set up their own inhouse motor insurance division. Potential problems exist within the Allianz Global Risk division, which specialises in corporate risk. In the aftermath of September 11, 2001, 39

41 combined ratio increased to 126.3% (end of 2002). At the time of writing, this figure is below 100%, however, a similar event/downturn could increase the ratio further. Company activity snapshot According to Allianz, German government plans to toughen supervision of insurance companies will impose needless costs and bureaucracy on firms. "The supervision of holdings will place a bureaucratic burden on internationally active firms such as Allianz. We can't see any notable added value for supervisors," said Allianz in the press release issued by the company in September Allianz would have to spend a six-figure Euro sum on extra audits of some 12 holding companies within the group. The proposed regulation is part of a law aimed at bringing reinsurers within the scope of Germany's supervisory authority, BaFin. German insurers are also expected to use the hearing at the end of September 2004 to attack plans for a life insurance policy guarantee fund modelled on the country's bank deposit guarantee scheme. The fund, financed by all companies, would step in to guarantee pay outs to policyholders should the company that wrote the policy go under, which would replace the voluntary Protektor fund set up by the industry in In July 2004, the spokesmen from UK insurance group Allianz Cornhill and parent Allianz in Germany dismissed rumours that the company had opened talks with Britannic Group to sell its closed life business as speculation. Reports in the UK press suggested Britannic, which now specialises in run-off and policy administration, could pay up to 150 million ($281 million) for the closed Allianz Cornhill life business. Allianz Cornhill s life operation was closed to new business in 2001 and currently has about half a million policyholders. The group had not stated formally that it would be open to offers from a third party but it would be likely to at least consider a sensible bid. Britannic is part of a fast-growing dedicated business for the management of discontinued life business in Europe and particularly in the UK. For Allianz, the sale of the life insurance business in the UK would mean limited presence in the UK. Such step would also send a message that Allianz is still trying 40

42 to cut costs (Allianz has been cutting costs since its acquisition of Dresdner Bank in 2001) and that instead of expanding, it is selling off businesses. Allianz AG agreed to sell its Mexican pension fund company to a subsidiary of HSBC Holdings plc for an estimated $29 million in July Allianz Rentas Vitalicias was founded in 1997 in the course of the privatisation of the Mexican pension system. Its customers currently receive annuities assigned through the nation's private sector social security system. The transaction follows the disposal of the Allianz pension fund company AFORE Allianz Dresdner in August Ironically, AFORE was also bought by the HSBC group. Both sales are part of Allianz's strategy to reduce complexity and costs, and focus on core markets and business. At the end of 2003 Allianz recorded a net profit for the third quarter as rising premiums helped it to overcome continuing weakness at its banking operations. Allianz reported net income of 372 million ($436.4 million), compared with a net loss of 2.52 billion in the year-earlier period, which included a 972 million pre-tax loss from subsidiary Dresdner Bank, 1.9 billion to cover the reduced value of equity holdings, $750 million in provisions for asbestos claims in the United States and 664 million for flood claims in central Europe. 41

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44 Chapter 4 Axa 43

45 Chapter 4 Axa Summary Axa, headquartered in Paris, France, is the holding company for an international group of financial services companies and it is one of the world's largest insurance companies. Insurance operations include activities in life insurance, property, casualty insurance and international insurance, including reinsurance. For the fiscal year ended December 2003, the company generated revenues of 71,628 million, down from 74,727 in In May 2004, a merger between MONY and Axa Financial was approved. Under the terms of the merger agreement, Axa Financial acquired 100% of MONY, the U.S. financial services group, headquartered in New York City. Axa has over 50 million clients worldwide, a global brand and unique product skills in areas such as insurance underwriting, long-term investments, financial advice and strong asset management centre. Previously, Axa's three businesses - Axa Insurance, Axa Life and Axa PPP Healthcare, were operated and marketed separately. Now, however, Axa started promoting its products under one line, enabling it to cross-sell more effectively. Overview Axa, headquartered in Paris, France, is the holding company for an international group of financial services companies and it is one of the world's largest insurance companies. Insurance operations include activities in life insurance, property, casualty insurance and international insurance, including reinsurance. Axa operates mainly in Western Europe, North America and the Asia/Pacific region and to a lesser extent, in Africa and South America. For the fiscal year ended December 2003, the company generated revenues of 71,628 million, down from 74,727 in

46 The Axa Group offers financial protection and wealth management to its customers through insurance and asset management. Axa is the holding company for a number of international companies with insurance operations that include life insurance, property and casualty insurance and international insurance, including reinsurance. The group has about 50 million clients, both individuals and businesses. Axa's insurance operations are geographically diverse, with activities in Europe, North America, and the Asia/Pacific region. Axa has five operating business segments; Life & Savings, Property & Casualty Insurance, International Insurance, Asset Management, and Other Financial Services. Each segment has subsidiaries, which operate in each of the principle markets. Axa's Life & Savings segment offers a broad range of life insurance products, including retirement and health insurance products for both individuals and corporate clients, with an emphasis on savings related products. Axa's Property & Casualty segment offers a range of personal and commercial insurance products, including automobile, homeowners, household, property and general liability insurance for both personal and medium sized companies. Axa's International Insurance segment business is primarily conducted by Axa Corporate Solutions, which includes both reinsurance activities (Axa Corporate Solutions Reinsurance) and large risks insurance (Axa Corporate Solutions Insurance). Axa's principal Asset Management companies are Alliance Capital Management and Axa Investment Managers. The Asset Management companies manage assets on behalf of retail investors, private clients and institutional clients as well as on behalf of companies affiliated with Axa. The Other Financial Services segment engages in financial activities in Belgium and in France. Axa Bank Belgium is a subsidiary of Axa Belgium that offers a spectrum of 45

47 financial services to individuals and small businesses. Axa Banque, based in Paris provides banking services dedicated to Axa. Its main activities include cash and securities flows management and bank account services to high net worth individual policyholders and to general agents of Axa France Assurance. History In 1816, Mutuelle de l'assurance contre l'incendie à Paris (MACL) was established as a mutual company offering fire insurance coverage. This was the first insurance company set up in France, and became part of the Axa Group when MACL was aligned with the Compagnie du Midi. A year later, Compagnie d'assurances Mutuelles contre l'incendie, was created, forging the origins of what later became the Axa Group. In 1991, the group acquired a controlling interest in The Equitable Companies, subsequently renamed to Axa Financial. In 1992, Axa AURORA was set up in Spain in partnership with BBV, Spain's second largest bank, while UAP acquired the European operations of the Groupe Victoire in 1993, before being privatised the next year brought the acquisition by Axa of Boréal in Canada and Victoire in Belgium, increasing the group's stake in Equitable to 60%, and the foundation of Axa Asset Management Europe. In 1996, Axa was listed on the New York Stock Exchange. A year later, Axa announced its intention to establish a presence in the People's Republic of China when that country opens its market to foreign insurers. Restructuring of Axa-UAP's insurance and assistance operations in France took place in 1998, resulting in the creation of three companies: Axa Assurances, Axa Courtage, Axa Conseil. During 2001 and 2002, Axa strengthened its core business positioning by acquiring two financial advisory networks in Australia, Sterling Grace and ipac Securities, and Banque Directe in France. 46

48 In May 2004, a merger between MONY and Axa Financial was approved. Under the terms of the merger agreement, Axa Financial acquired 100% of MONY, the U.S. financial services group, headquartered in New York City, which, through its various subsidiaries, manufactures and distributes life insurance, asset accumulation and retail brokerage products and services to individuals, corporations and institutions through advisory and wholesale distribution channels. SWOT analysis Figure 4.5: SWOT analysis of Axa Strengths Weaknesses Strong presence worldwide Decrease in revenues in life insurance business Opportunities Threats Wider product offering in life insurance Strengthen the brand Increase its exposure in Asia Market fluctuations Competition Source: Author analysis Business Insights Strengths Strong presence worldwide: Axa has over 50 million clients worldwide, a global brand, unique product skills in areas such as insurance underwriting, long-term investments, and financial advice, and strong asset management centre. All of these enable Axa to 47

49 compete on a global basis and offer a wide range of products to its existing customers and acquire steady numbers of new customers. Weaknesses Decrease in revenues in life insurance business: within Axa, total revenues decreased from 74,832 million in 2001 down to 71,628 million in This decline is mainly due to the problems within the life insurance part of the business, where the revenues dropped from 48,399 million in 2001 to 46,812 million in Non life insurance experienced steady growth over 2001 to Opportunities Wider product offering in life insurance: in the past, Axa's life & savings operations have experienced significant growth in savings-related unit-linked products. This growth took place mainly in Europe and Asia Pacific, however after 2001 performance in the life insurance division has been declining, and now the company is experiencing negative growth in this sector. Strengthen the brand: previously, Axa's three businesses - Axa Insurance, Axa Life and Axa PPP Healthcare - were operated and marketed separately. Now, however, Axa has started promoting its products under one line, enabling it to cross-sell more effectively. Axa claims the branding reflects its strategy of becoming more open with customers. Increase its exposure in Asia: the company is now trying to achieve this aim, aware that as a global insurer it must take advantage of the strong growth in the region. There are four key locations Axa is looking at: China, Hong Kong, Thailand and Singapore. Threats Market fluctuations: fluctuations in the markets and other economic factors have a direct impact on sales of all Axa's products. Any declines in the stock or bond markets often reduce the popularity of these products, while declines in equity markets have a 48

50 direct impact on the performance of the company as a whole, as well as products linked to equities, for example unit linked insurance. When interest rates decrease, life insurance and annuity products are more attractive to consumers, resulting in increased premium payments on products with flexible premium features, and a higher percentage of insurance policies remaining in force from year to year. Investment earnings at Axa are therefore lower in this period because its interest earnings have declined. When interest rates rise, there is also a risk for Axa in that profitability may suffer due to a reduction in the spread between interest rates credited to policyholders and returns on the investment portfolio. Competition: there has been significant consolidation in the financial services industry on a global scale. While this has reduced the number of competitors, especially in the U.S. market, there is still fierce competition Axa needs to continue to be aware of, especially when it comes to offering cheaper products. Company activity snapshot Axa announced in August 2004 that it is looking for further acquisitions, further to an announcement of a proposed expansion in Asia Pacific and the completion of a takeover in the United States (MONY). Axa launched a $2.2 billion offer to buy out the minority shareholders who own 48.44% of Axa Asia Pacific Holdings, the group's Australian-based subsidiary. Henri de Castries, Axa's chief executive, said: "From a shareholder point of view it makes sense to increase your exposure to a region with high growth and good value in terms of currency. We want to accelerate our efforts in Asia, and the first way to increase our exposure is to buy out the minorities in Australia. This will double our exposure to the non-japanese portion of Asia." Axa also said that China, Hong Kong, Thailand, Singapore are the key places the company wants to increase its exposure into; in May 2004 National Australia Bank decided to sell Axa insurance products in the UK after having formed new strategic alliance with Axa to offer commercial 49

51 insurance products and services through its three UK banks. From July 2004, business customers of the National's Clydesdale, Yorkshire and Northern Banks are offered Axa commercial insurance products. It is anticipated that employees currently working within the National's commercial insurance division will transfer across to Axa; after an eight-month struggle Axa has finally won approval in May 2004 to complete its takeover of MONY Group, the American life insurance company, for $1.5 billion. Although Axa had faced significant opposition from a few of MONY's largest investors, the company's stockholders have now narrowly voted to approve the proposed merger with Axa Financia', the French insurer's U.S. division. Although the transaction remains subject to certain required regulatory approvals and other conditions, it is expected to close at the end of the second quarter or the beginning of the third quarter of Under the merger agreement, MONY stockholders will receive $31 in cash from Axa Financial, plus dividends of approximately $0.33 to $0.35 from MONY, for each share of MONY common stock. Axa Financial meanwhile, will now be able to increase its insurance and annuity sales distribution by about 25%. Through this purchase, expected to close in the first quarter, Axa will become the leading variable life insurance provider in the US, by sales, and the number four provider of variable annuities; Axa is expected to announce proposals to acquire a number of companies in Europe, with a focus on Italy and Spain. Analysts have said that by increasing its acquisitions in southern Europe, the company would gain a larger market share in a high growth area where it is currently relatively weak. Also, by increasing its presence in Continental Europe, Axa could increase its customer base by targeting high growth areas, which are underserved and have familiar market conditions. Expansion into other countries, such as Australia, has also been predicted by some analysts. However, they have doubted whether the company would wish to increase its presence in such European nations as Germany and Britain, as these nations are believed to have weak growth prospects; 50

52 Axa Insurance has said it will cut its motor insurance premiums in Ireland in 2005 in response to lower claims awards, the company told the Joint Oireachtas Committee on Enterprise and Small Business that premiums would fall by between 1% and 20%. Axa follows the lead given by another of Ireland's largest insurers, Allianz AG, who announced it would cut its rates by 7.5% in the New Year. 51

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54 Chapter 5 American International Group, Inc. 53

55 Chapter 5 American International Group, Inc. Summary American International Group (AIG), headquartered in New York is composed of member companies that offer a range of commercial and personal insurance products through a variety of distribution channels in approximately 130 countries. For fiscal year 2003 AIG's revenues were $81,300 million, an increase of 20.5% on the previous year's results of $67,400 million. This increase was due to the growth of the company's general and life insurance premiums. AIG has had one of the better track records in the financial world; it enjoys superior financial strength, established global presence, and strong earnings growth prospects. Personal insurance has suffered from poor performance over the past several years largely due to higher catastrophe losses in populated areas, inflationary pressures, fraud, mould claims, and most of all, inadequate pricing caused by competition. Overview American International Group (AIG), headquartered in New York is composed of member companies that offer a range of commercial and personal insurance products through a variety of distribution channels in approximately 130 countries. The company operates domestic and foreign general insurance, domestic and foreign life insurance, financial services, and retirement services and asset management. The general insurance business includes underwriters of commercial and industrial insurance, an international property-casualty network, a personal lines business that concentrates on auto insurance and high-net-worth clients, and mortgage guaranty insurance activities. 54

56 AIG's life insurance group includes the company's AIG American General subsidiary in the United States, as well as other operations in around 70 countries. The company distributes its products through banks, retail stores, and the Internet. Other life insurance companies include AIG Edison Life Insurance and AIG Annuity Insurance. The financial services business incorporates companies that operate in the fields of aircraft finance, capital markets, consumer finance, and insurance premium finance. The company's retirement services and asset management group consists of the AIG SunAmerica, AIG VALIC, and AIG Advisor Group businesses, which issue annuities within the US. Another group company, AIG Global Investment Group, is involved with third-party institutional, retail, and private fund assets, as well as AIG's insurance invested assets. For fiscal year 2003 AIG's revenues were $81,300 million, an increase of 20.5% on the previous year's results of $67,400 million. This increase was due to the growth of the company's general and life insurance premiums. Net income for 2003 was $9,200 million, an increase of 68% compared with History AIG's history starts in 1919 in China when an American entrepreneur, Mr Starr, opened a small insurance agency called American Asiatic Underwriters (AAU). Not long after, Mr Starr set up Asia Life Insurance to market life insurance to the Chinese population. Within 10 years, the company had established offices and agencies across China and in Hong Kong, Indochina, Indonesia; Jakarta, Indonesia; Kuala Lumpur, Malaysia; and the Philippines. Starr made his first move into the U.S. market with the formation of American International Underwriters (AIU) in In the 1930s AIU established a regional headquarters in Havana. Offices in half a dozen Latin American countries followed in rapid succession, and by 1945, AIU's premium income in Latin America had surpassed that in Asia. 55

57 As political unrest spread in China and East Asia, Starr moved his companies' headquarters to New York in Two years later virtually the entire Far Eastern operation was brought to a halt by the Pacific war. Following the war, AIU entered Japan by invitation of the American military, initially to insure property of U.S. troops. By 1951, the ban on foreign companies underwriting general insurance was lifted and AIU in Japan began a period of significant growth. AIU was established in Germany in 1946 in much the same way. In 1979, AIG was the first western insurance organisation to establish joint ventures with Hungary, Poland and Romania. In 1980, a joint venture with the People's Insurance Company of China marked the precursor of its return to China a decade later. The formation of AIG Financial Products and AIG Trading occurred in 1990, as well as that of International Lease Finance. In January 2001, AIG announced that one of its subsidiaries had purchased the issued share capital of Norwich Union Holdings (Canada) Limited, itself a subsidiary of the UK-based CGNU (now Aviva), for approximately C$159 million in cash and special dividends. On May 14, 2001, AIG announced the purchase of American General for $23 billion in stock. Prudential dropped the lawsuit it filed in April 2001 against AIG that accused the New York insurer of interfering with its own contract to buy American General, violating securities laws and mischaracterising its offer. In August 2003, AIG completed the acquisition of GE Edison Life Insurance in Japan. The group's existing life insurance businesses operated in the country through American Life Insurance (ALICO Japan), and AIG Star Life Insurance. AIG was the largest foreign property-casualty insurance organisation in Japan, operating through the Japanese branches of AIU Insurance (AIU) and American Home Assurance. In the same month, the company acquired GE's U.S.-based auto and home insurance business. 56

58 In March 2004 the company formed AIG Higher Education Risk Solutions, a division of the company's property and casualty insurance subsidiaries, to provide property-casualty insurance solutions that cover the liabilities of the higher education market. SWOT analysis Figure 5.6: SWOT analysis of AIG Strengths Weaknesses Strong financials Global presence Wide and diverse product offering Foreign life assurance Personal insurance The group's increased level of disclosure Opportunities Threats Expansion in Asian markets Industry consolidation Expand electronic business offering Slow down in life insurance Government regulation Market fluctuations Source: Author analysis Business Insights Strengths Strong financials: AIG has had one of the better track records in the financial arena; it enjoys superior financial strength, established global presence, and strong earnings growth prospects. In 2003, its operating profits rose dramatically, driven by growth in its business insurance line and particularly from the recovery from the effects of 2001 World Trade Centre attacks and the global recession that followed. Such financial strength means that even in the times of economic slowdown, AIG is able to remain 57

59 competitive and achieve profitability. For fiscal year 2003 AIG's revenues were $81.3 billion, an increase of 20.5% on the previous year's results of $67.4 billion. Global presence: AIG is a truly global company, it is the largest commercial and industrial underwriter in the United States and the leading domestic provider of property and casualty and specialty insurance. It also possesses the fifth-largest retail securities sales force in the United States. It holds considerable overseas operations, with 43.2% of revenues coming from its life insurance business and 24.4% coming from abroad, mainly Asia. Wide and diverse product offering: AIG has a wide range of product and business lines, including motor, property and casualty, life, mortgage guaranty, annuities, trading, and aircraft leasing. It also has a growing presence in the financial services and asset management fields. Foreign life assurance: the foreign life insurance business is AIG's most important and unique operation. Roughly two-thirds of AIG's worldwide life-insurance earnings originate from outside the United States, so this area is an important focus for investors. With a strong presence in many developing nations, AIG began cross-selling a range of financial products in those markets. In 1995 the company formed the Asian Infrastructure Fund, a mutual fund for individual investors. The following year AIG acquired SPC Credit, a consumer and commercial finance company with offices in the Philippines, Taiwan, and Thailand. Weaknesses Personal insurance: personal insurance has been suffering from poor performance over the past several years largely due to higher catastrophe losses in populated areas, inflationary pressures, fraud, mould claims, and, most of all, inadequate pricing caused by competition. 58

60 The group's increased level of disclosure: this has reinforced investor perceptions that the company is almost too vast and complex to accurately project its future growth potential. AIG is already the world's largest primary commercial property and casualty insurer, the largest U.S. life insurer in terms of premiums and deposits. AIG has a reputation of being difficult to understand due to its size and complexity and there are concerns that, as the company moves to increase transparency, investors, unaware of the extent of AIG s portfolio, may discover that AIG is more than just a property and casualty insurer. Opportunities Expansion in Asian markets: the Asian life insurance market is one of the potential locations where AIG could expand its growth even further. Opportunities are considerable, as Japan is deregulating the insurance market, and China is experiencing strong economic growth. China itself offers AIG excellent prospects as the 500 millionstrong Chinese middle-class population is largely untouched by the life insurance industry. Industry consolidation: this has meant that AIG has faced reduced competition, especially in the domestic life insurance and wealth management markets. The reduction in competition will provide AIG with the opportunity to increase its sales and market share as competitors exit the market. Expand electronic business offering: AIG Technologies is a leading supplier of information technology solutions, including applications geared to the insurance industry, data centre managed operations and consulting services. AIGT's data centre facilities combine to form an innovative, world-class infrastructure that affords clients with extensive, on-demand processing power, complete redundancy, disaster recovery and critical business contingency opportunities. In the current climate many companies are looking for ways to streamline their increasingly diverse insurance and financial offerings. The AIG group has also developed its own web-based facilities further, which 59

61 will help to streamline processes while increasing the speed and accuracy of the company's reporting procedures. Threats Slow down in life insurance: AIG's life operation, including its retirement savings business, threatens to slow soon. Although earnings are strong in many of the individual project areas, the top line picture for AIG's life and annuity business is not nearly as bright as the earnings growth has been. Government regulation: AIG's insurance business is subject to comprehensive regulation and supervision in all countries in which the company operates. Changes in existing insurance laws and regulations may affect the ways in which the group conducts its business and the products it may offer. In addition, changes in pension and employee benefit regulation, social security regulation, financial services regulation, taxation and the regulation of securities products and transactions may also adversely affect the company's ability to sell new policies or its claims exposure on existing policies. Strong competition: AIG faces strong competition from industry rivals across many of the markets that it operates in. The company's main competitors include American International Group, Power Financial, Prudential, Sun Life Financial, Lincoln National, Nationwide Financial Services and Principle Financial Group. All of these companies could combine to take away sales and market share from AIG. Market fluctuations: fluctuations in the securities markets have adversely affected and may continue to adversely affect AIG's profitability, as well as its sales of pension products, variable annuities and variable life insurance. The levels of volatility in the markets in which the company invests and the overall investment returns earned in those markets will also continue to threaten and affect profitability. 60

62 Chapter 6 Assicurazioni Generali S.p.A 61

63 Chapter 6 Assicurazioni Generali S.p.A. Summary Assicurazioni Generali, through over 626 subsidiaries and affiliates, provides a variety of insurance services, primarily accident & health insurance. The company also provides life and title insurance, real estate services, and a range of other investment activities. For the fiscal year ended December 2003, Generali reported revenues of 65,573 million, an increase of 3.19% from the previous fiscal year. In the same period, group profit increased from million to 1,015.1 million. Generali is a market leader in Italy, with a market share in life insurance of 19.5% and 17% in non-life insurance. Generali s strong position is mainly due to the fact that the company made profitable acquisitions in the past, and has been able to achieve and maintain profitability. Generali continues to expand its investment and it reported an increase of 11.4% between 2002 and Total investments have reached the level of 230 billion at the end of Generali is now facing a challenge while trying to consolidate its recent acquisitions in France, which includes Le Continent and a portfolio from Zurich Financial Services. If this acquisition is successful, it can contribute to Generali s stronger position in France. Overview Assicurazioni Generali, through over 626 subsidiaries and affiliates, provides a variety of insurance services, primarily accident & health insurance. The company also provides life and title insurance, real estate services, and a range of other investment activities. It is headquartered in Trieste, Italy. About 185 companies make up the core of the Generali Group, which holds interests in many more companies. 62

64 Generali carries out insurance operations in some 50 markets worldwide, through a network of more than 190 local units, consisting of branches and subsidiary companies. It also carries out operations through a number of specialised offices providing assistance to multinational clients. The group's main markets are: Italy, with around 39% of total revenues, Germany with 26%, France with 17% and Austria with 4%. In terms of written premiums, the Generali Group holds the fourth place in Europe and ranks among the 10 largest insurers at world level in terms of assets under management. For the fiscal year ended December 2003, Generali reported revenues of 65,573 million, an increase of 3.19% from the previous fiscal year. In the same period, group profit increased from million to 1,015.1 million. Total Generali group premium income was up by 4.8% in 2003 at 49,603.4 million. History Assicurazioni Generali was established in December 1831, to meet the demand for an insurance company with the necessary technical and financial structures to operate in the international trade industry. A few months after its foundation, Generali began to expand with offices in France, Germany, and Switzerland. Generali then expanded into the Balkans and Eastern Europe, from Warsaw to St. Petersburg, and within a few decades had also reached Africa, Asia and North and South America. The 1990s saw an extensive period of growth for the company. In October 1995, it signed a letter of intent with Can Insurance to enhance mutual business interests throughout the world. The following year, it signed a protocol understanding with Bank Leumi, Tel Aviv, aimed at acquiring through Leumi Insurance Holding (LIH) the 63

65 control of Migdal, the Israeli insurance company, in which they already held a 27% interest. In June 2003, Bancassurance activities of the two groups - Alleanza Assicurazioni and Banca Intesa were unified to create the new company - Intesa Vita. In July 2003, Generali Group acquired Le Continent from Toro for an estimated value of 290 million, which strengthened the group's position in France. In February 2004, Generali and EBRD (the European Bank for Reconstruction and Development) signed an agreement for the setting up of a new real estate fund with the aim of investing in the real estate sector in central and eastern European countries, which in May 2004 became members of the EU: Hungary, Poland, Czech Republic, Slovakia, Slovenia, Estonia, Lithuania, Latvia, Romania and Bulgaria. The Fund, called "Accession Fund", would be set up as an SICAV under Luxemburg law, and would have up to 300 million equity. Generali Group would contribute 90 million and the EBRD up to 75 million. 64

66 SWOT analysis Figure 6.7: SWOT analysis of Generali Strengths Weaknesses Strong position in Italy Strong financial performance Steady growth in investments Trying to maintain leading position in Europe High cost of Austrian operations Low exposure to markets outside of Europe High combined ratio Opportunities Threats Focus on core markets Exceptional growth in Generali s life insurance business Too Over caucious cautious investment profile Source: Author analysis Business Insights Strengths Strong position in Italy: Generali is a market leader in Italy, with a market share in life insurance of 19.5% and 17% in non-life insurance. Generali s strong position is mainly due to the fact that the company made profitable acquisitions in the past, and has been able to achieve and maintain profitability. Examples include the Banca Primavera in 2003, which means that Generali now has access to the largest network of financial consultants in Italy. Life insurance business (accounting for 60% of consolidated premium income) grew by 7.9%, driven by new business (for example, an agreement with Banca Intesa). It is important to note this significant growth in life insurance business, since Generali is one of the very few companies that managed to not only avoid losses, but also achieve profitability in the life insurance sector, where most 65

67 companies were troubled by the recession and produced poor results. Generali has also achieved a strong position on other markets, including Germany, France and Spain. Generali The insurer benefited greatly from its operations in Spain reaching a profit of 100 million in Also, the sales of Generali insurance products through Commerzbank (Generali owns 10% of the bank) in Germany were up by 40% at the end of Strong financial performance: Generali is rather different to its competitors in a way that it manages its investments differently. The company, unlike other insurers profiled in this report, has a low exposure to equity, asset management and commercial banking. Also the fact that it has no direct investment links with the United States and Japan means that it has maintained financial stability and has not experienced any significant losses during the recession of 2001 and Generali s balance sheet is very strong and has 1.7 billion in excess capital. Steady growth in investments: Generali continues to expand its investment and it reported an increase of 11.4% between 2002 and Total investments have reached the level of 230 billion at the end of When compared to its competitors, Generali s exposure to equities in proportion to bonds is much lower, and in 2003 Generali s investment portfolio was represented mainly by bonds, in 55.6% and equity accounted for only 6.5%. Weaknesses Trying to maintain a leading position in Europe: Generali is now facing a challenge while trying to consolidate its recent acquisitions in France, which includes Le Continent and a portfolio from Zurich Financial Services. If this acquisition is successful, it can contribute to Generali s stronger position in France. This acquisition increases Generali s market share of the French insurance market to 6.5%. 66

68 High cost of Austrian operations: the group reported decline in profits in 2002 from its Austrian subsidiary, mainly due to the high cost structure on the Austrian insurance market and the high levels of taxation in the country. Low exposure to markets outside of Europe: Assicurazioni Generali has limited exposure to markets outside of Europe. This may prove to be a problem for the company in the future, since the potential for growth in Europe is becoming rather limited. Generali has already started considering expansion outside of Europe (including China and Philippines), and in 2002 the company entered the Thailand's life- and non-life insurance markets through a strategic alliance forming two joint ventures with the Tantipipatpong family. High combined ratio: Generali's combined ratio was 110.4% for 2000, 108.4% for 2001 and 107.9% for The company ended 2003 with a combined ratio of 104.2%. It is expected that it will take time to reduce - especially given the restructuring required in the 'problem' areas, for example in Germany. Opportunities Focus on core markets: Generali reported positive trend in underwriting in Europe, where direct premium income grew by 5.5% to 48.6 billion in Generali is one of the few insurance providers, which recorded profitability in insurance underwriting in Europe. Exceptional growth in Generali s life insurance business: Generali s life insurance business (accounting for 60% of consolidated premium income) grew by 7.9%, driven by new business. Generali's gross premiums reported almost double-digit growth in Italy. Alongside Spain and Germany, Italy has the fastest ageing European population, which contributes to the higher demand for life insurance products and pensions. The new co-operative distribution venture with Banca Intesa has further strengthen Generali s position in Italy and now Generali group underwrites 39% of all lifeinsurance premiums in Italy. 67

69 Threats Too cautious investment profile: the group's defensive profile is considered by some analysts to be a disadvantage for Generali, especially in the future market environment. It seems that nowadays large financial groups enjoy stronger exposure to equities, especially through the exposure to the U.S. life insurance market (Generali does not have any exposure to the United States). Furthermore, the upward trend in interest rates could limit the growth in revalued net asset value, which at present includes unrealised bond capital gains. Company activity snapshot In February 2004 China's insurance-market regulator cleared Generali to launch operations in Beijing. The launch is part of efforts by Generali to capture part of China's fast growing life-insurance market, following the steps of other global insurance competitors. Generali started a joint venture with China National Petroleum Corp and formed Generali China Life Insurance, planning to sell lifeinsurance products in Beijing via its sales force and via local banks. Generali can now enter a market of about 12 million people, or 8% of China's domestic lifeinsurance market. The new license is part of Generali's larger efforts to expand in Asia. The Chinese life-insurance market has grown 44% a year since According to analysts, the Chinese market is a long way from reaching a maturity phase and is therefore considered to offer best growth prospects for insurers. Generali announced in March 2004 that it planned to meet or beat targets in 2004 despite economic growth being slower than expected. Generali s shares in March 2004 gained 2.8% to after it reported a net profit of 1.02 billion ($1.25 billion) for 2003 compared with a loss of 754 million the previous year, above its target and many analysts' expectations. 68

70 Chapter 7 ING Groep N.V. 69

71 Chapter 7 ING Groep N.V. Summary ING Groep, headquartered in Amsterdam, the Netherlands, is a financial institution, offering banking, insurance and asset management to about 50 million clients in 60 countries. For the fiscal year ended December 2003, the company's revenues were 69,073 million, a 9.2% decrease from the previous year. Through the acquisitions of Reliastar and Aetna Financial Services in 2000, ING became one of the top 10 life insurers in the United States. ING is currently also number one in life insurance in the Netherlands and number two in property and casualty insurance and its brand is well known across Europe. Distribution is one of the strongest features of ING. It operates a 'click call face' type of distribution; meaning a flexible mix of Internet, call centres, intermediaries and branches. ING is currently actively reorganising its global insurance business, closing and selling the subsidiaries, which are not profitable (e.g. in Argentina and non-life insurance arm in Australia), at the same time focusing on conquering new, more promising markets, for example in China. Overview ING Groep, headquartered in Amsterdam, the Netherlands, is a financial institution, offering banking, insurance and asset management to about 50 million clients in 60 countries. ING Groep offers life, health, and disability products; personal insurance lines (auto and fire coverage); commercial property/casualty insurance and reinsurance. ING's banking lines range from post office deposit accounts (the Postbanks) in the Netherlands to consumer and corporate banking throughout Europe. Other lines are corporate 70

72 finance, securities, and investment and asset management services (through its ING banking network subsidiary) and auto, airplane, and other equipment leasing. ING offers savings and investment accounts, retirement accounts and investment funds. It also offers a wide range of mutual funds, various forms of securities brokerage and asset management services. Individual loans range from credit on current accounts to a mortgage loan tied to a securities portfolio. ING offers loan products via its branches, the Internet, the telephone, through a financial intermediary or an account manager. In addition, individual insurance includes life insurance and pension services. It also offers medical insurance, as well as insurance protection against fires, car accidents and other risks. ING Groep's operating segments relate to the internal business segmentation by executive centres. These include the geographical areas ING Europe (including ING Direct activities outside Europe and wholesale banking activities worldwide), ING Americas (including the group's reinsurance activities) and ING Asia/Pacific and ING Asset Management. Other mainly includes items not directly attributable to the executive centres. For the fiscal year ended December 2003, the company's revenues were 69,073 million, a 9.2% decrease from the previous year. Operating net profit amounted to 4,053 million, an 18.1% increase compared with Banking profits were up by 72.6%, which compensated for the somewhat weaker performance of insurance activities. History ING originated in 1991 from the merger between Nationale-Nederlanden and NMB Postbank Group. The company was renamed Internationale Nederlanden Group (ING Groep). Nationale-Nederlanden was established in April As a result of extensive 71

73 acquisitions in the United States, Canada and Australia, more than half of its revenues were accrued from foreign markets. Moreover, it was one of the largest domestic investors, selling insurance products through its intermediaries. Since its formation ING has experienced a period of rapid growth. It expanded its scope through the acquisition of the investment bank, Barings, in 1995 and the American insurer Equitable of Iowa Companies in The purchase of the Belgian Bank Brussels Lambert in January 1998 added to this growth, as did the acquisition of the German BHF-Bank in 1999; and the American insurer ReliaStar in This acquisition strategy continued in October 2000 with the purchase of Afore Bital, a Mexican private pension fund. December 2000 saw the company acquire Aetna Financial Services for $7.7 billion and Aetna International. Meanwhile, in the same month the company's subsidiary, ING Canada, purchased Esquisure Financial Networks. It was reported in March 2003, that ING Groep was seeking to introduce more costcutting measures and decided to announce more job cuts, as a result of pressure on revenue growth in the European banking and insurance sectors continuing over the next two years. ING acquired full ownership of DiBa (Germany) in July ING acquired an additional 30% stake in DiBa (Allgemeine Deutsche Direktbank) from BGAG, the investment company of a number of German trade unions. ING currently owns all shares in DiBa. In March 2004, ING agreed to sell off its Asian equities business (the former Asian equities business of Barings) to Macquarie Bank, a pre-eminent provider of investment banking and financial services that operates throughout Australia and selected international markets. 72

74 In May 2004, ING agreed to sell its 50% interest in joint venture, Mercantile Mutual, for around $525 million (A$765 million) to Australian insurance group, QBE. In June 2004 ING Lease, a subsidiary of the ING Group, completed the acquisition of the asset finance and leasing businesses from Abbey National plc. Also in June the company announced it had reached an agreement in principle to buy a 49% stake in KB Life, a new life insurance company being formed in Korea by Kookmin Bank. SWOT analysis Figure 7.8: SWOT analysis of ING Groep Strengths Weaknesses Strong and well established position in insurance markets Wide diversification of locations, products and distribution channels Strong distribution channels Low profitability in some markets High leverage Worse position in home market Opportunities Threats Growth of ING Direct Reduced exposure to equity markets Entering emerging markets Abolition of tax reliefs in the Netherlands and declining earnings Diminishing capital Source: Author analysis Business Insights 73

75 Strengths Strong and well established position in insurance markets: through the acquisitions of Reliastar and Aetna Financial Services in 2000, ING became one of the top 10 life insurers in the United States. ING is currently also number one in life insurance in the Netherlands and number two in property and casualty insurance and its brand is well known across Europe. Wide diversification of locations, products and distribution channels: the operations of ING are strongly diversified in terms of activities (life, non-life insurance, investment and retail banking), geographic exposure (developed countries as well as high-growth emerging markets), distribution channels and segments targeted. The fact that the company is so diversified in terms of its product offering means that it faces lower risks than others. Strong distribution channels: distribution is one of the strongest features of ING. It operates a 'click call face' type of distribution; meaning a flexible mix of Internet, call centres, intermediaries and branches. This enables ING to deliver and reach their customers quickly and effectively. The right distribution channel mix is a key to success for insurers in today s increasingly competitive market. Weaknesses Low profitability in some markets: the company's worst performing market is the United States, which ING entered in the second half of the 1990s via three large acquisitions. The problems that ING faces in the United States, since the completion of the acquisitions of Aetna and ReliaStar, have been getting worse since the September 11 events. The main reason behind low profitability of ING in the U.S. markets is the weak performance of equity markets, which had an impact on most of the global insurers. Other reasons include the low interest rates, which again are causing problems for many insurers operating in the United States. 74

76 High leverage: this is one of the main weaknesses ING is facing at the moment. According to the industry, the double usage of capital on banking and on insurance should not be above 25%, while the level that ING faces at the moment is 30%. Compared with other companies, for example, Fortis, ING is potentially under more strain in case the economic circumstances change negatively. Worsening position in home market, Belgium: ING's market position in Belgium has deteriorated and ING, once the largest in the Belgian market, now had to give up to BBL s leadership in the Belgian market. Opportunities Growth of ING Direct: the export of the company's direct marketing concept (ING Direct), which has been very successful and profitable in the Netherlands for several years under the name Postbank, has enabled the company to enter new markets, such as Canada, Spain, Australia, France, United States and Italy, at a relatively low cost. Reduced exposure to equity markets: at June 30, 2003, equity investments had returned to their cost value, up from March 31, 2003 when unrealised capital losses amounted to 735 million. Entering emerging markets: in India, ING last year increased its stake to 44% in Vysya Bank, the number five private bank. One of the recent examples of new market entry is the announcement by ING Group and Beijing Capital Group that their joint venture, ING Capital Life Insurance Company, has received approval from the China Insurance Regulatory Committee to establish a branch office in Beijing. China at the moment is the land of opportunities for the troubled global insurers needing to recover their losses. However, there are also substantial legal and political risks associated with entry into these emerging markets. Further, there is also risk of failure to replicate the current successful business strategy in these markets. 75

77 Threats Abolition of tax relief in the Netherlands and declining earnings: the Dutch life market was one of the most depressed in Europe in 2002 and 2003, with premium income falling by 7%, largely because of the phased abolition of tax advantages on life insurance products. Diminishing capital: from the beginning of 2000 to December 2003, shareholders' funds decreased from 34.6 billion to 21.3 billion. Company activity snapshot ING Capital Life Insurance announced in September 2004 that it is to launch in Beijing. ING Group and Beijing Capital Group announced that its joint venture, ING Capital Life Insurance Company has now received approval from the China Insurance Regulatory Committee to establish a branch office in Beijing. The ICLIC Beijing branch will initially employ up to 300 tied-sales agents, and offer a mix of traditional life and personal accident policies to customers. Operations are due to commence in the first quarter of 2005 and the ICLIC Beijing branch is expected to employ up to 1,000 agents by the end of the year. The Beijing market saw growth in 2003 of 24.8% to reach total life insurance premium income of US$2.25 billion. ING expects that the premium growth rate will continue to remain strong, and since ING, in a similar position to other global insurers, desperately needs new markets for entry in order to make up for the losses it incurred so far, Asia seems to be one of the most promising. ING is hoping that the strong growth in the region will have a positive impact on their life insurance business; in June 2004, ING has signed a contract with NetEconomy, a leader in real-time enterprise risk monitoring solutions for the finance industry, to roll out a worldwide effort to combat money laundering and ensure compliance. The contract covers multiple installations of NetEconomy's Erase Compliance Manager Solution. The first system has already been accepted at ING Luxembourg. This is just another step 76

78 to ensure that ING is a reputable and safe business, and the company is hoping that this will have a positive impact on the credibility of ING; in May 2004, QBE Insurance Group, Australia's largest property and casualty insurer, has agreed to pay ING Group $765 million to acquire the Dutch financial service company's 50% stake in its Australian joint venture. QBE will take complete control of Mercantile Mutual as part of plans to expand its operations in Australia's strongly performing insurance market. QBE has also agreed to purchase Mercantile Equities Pty Limited, a small subsidiary of Mercantile Mutual. ING said that while the collaboration had shown a strong record of profitability, the company had chosen to withdraw from the non-life insurance industry in Australia in favour of concentrating upon its core wealth management, direct banking and real estate businesses. This indicates that non-life insurance was not a profitable area for ING in Australia, and therefore the company decided to focus its efforts in areas where it can achieve profitability. ING is currently Australia's fourth largest retail fund manager, the third largest life insurer in terms of new business premiums and Australia's leading direct bank. ING is also one of the largest real estate managers and property developers in Australia, which means that ING has many other businesses in Australia where it can achieve profitability; following a review of its business, in February 2004, ING announced plans to reorganise ING Insurance in Argentina. As a result of this decision, ING Insurance Argentina is closing its branch offices throughout the country and will be terminating the 650 staff at these locations, as well as part of the Buenos Aires head office. ING made the decision following a strategic business review process that determined its Argentina unit was not generating sufficient return on investment. This strategic move, including others outlined previously in this profile, indicate that ING is actively reorganising its global insurance business, closing and selling the subsidiaries which are not profitable (e.g. in Argentina and non-life insurance arm in Australia), at the same time focusing on conquering new, more promising markets, for example China. 77

79 78

80 Chapter 8 Nippon Life Insurance Company 79

81 Chapter 8 Nippon Life Insurance Company Summary Nippon Life is the largest provider of life insurance in Japan, and at the same time one of the world s largest insurers in terms of total assets and insurance policies. Its consolidated total revenues amounted to 7,454.1 billion ($62,014 million) in 2003, a decrease of 6.6% from the previous fiscal year. Nippon Life operates key subsidiaries abroad. In the United States, where the company has been present for 20 years, the company owns Nippon Life Insurance Company of America. However, Asian countries are now the key development areas for Nippon Life, where it is expecting high rates of economic growth, as well as counting on the fact that the insurance participation ration is relatively low. One of the key strengths of Nippon Life is its strongly positioned brand name in the Japanese life insurance market, where the company holds a market share of 20%. The greatest opportunities for Nippon Life at the moment include the expansion in Asia and development of new products, at the same time improving the quality of the services. Overview Nippon Life, (also know as Nissay) based in Osaka, Japan, is both the largest provider of life insurance in Japan and one of the world's largest insurance companies in terms of total assets and insurance policies. It is one of the Big Three Japanese life insurance companies, which include Dai-Ichi Mutual Life and Sumimoto Life. The company's core business is life insurance, and products and services within this area are made available to both individual and corporate/group clients. Nippon Life also offers non-life products 80

82 and such cover as medical treatment and long-term care, as well as asset management/asset formation products. Nippon Life Insurance's consolidated total revenues amounted to 7,454.1 billion ($62,014 million) in 2003, a decrease of 6.6% from the previous fiscal year. Operating income dropped 60.2% from the previous fiscal year to billion ($1,138 billion). The company operates (with its subsidiaries), a central framework for insurance provision, the Nissay Insurance Account. This co-operative platform offers discounts and integration of client's life and non-life policies under one account. A tie-up with Japan Net Bank also allows for online access and manipulation of bank and insurance accounts under the Nissay Insurance Account heading. The company offers corporate risk consulting, facilitated through a co-operative arrangement with subsidiary Nissay Dowa General Insurance Company. The company operates several alliances with outside companies, particularly in the area of re-insurance where it co-operates with Swiss Reinsurance Company, Munich Reinsurance Company, Cathay Life Insurance Company, Samsung Life Insurance Company and Zurich Life Insurance Company. In the field of asset management, it has alliances with Putnam Investments and Deutsche Bank and part-owns PanAgora Asset Management based in Boston, Massachusetts, United States. Subsidiary, Nissay Dowa General Insurance Company Limited was itself the end result of a co-operative arrangement between Nippon Life and the Dowa Fire and Marine Insurance Company, which developed into a merger between Dowa and Nissay General Insurance. Nippon Life operates key subsidiaries abroad. In the United States, where the company has been present for 20 years, the company owns Nippon Life Insurance Company of America. NLIA was originally established to provide employee benefit programmes for Japanese companies operating in the United States and now it offers products and services under its own brand. With branches in New York, Los Angeles and Chicago, Nippon Life is the only Japanese insurer in the United States to underwrite group 81

83 insurance products, such as health insurance, term life insurance and income protection insurance. The company also owns Nippon Life Insurance Company of the Philippines, established in 1997, which it operates as a joint venture with the Yuchengco Group, one of the biggest financial services companies in Philippines. In Thailand, the company acquired a stake in Bangkok Life Assurance Limited in These subsidiaries abroad primarily focus on the provision of services to Japanese companies, although, as in other areas, diversification is becoming the order of the day, widening the customer base. Asian countries are now the key development areas for Nippon, where the company is expecting high rates of economic growth, as well as counting on the fact that the insurance participation ration is relatively low. History The Nippon Life Insurance Company was established as a limited company in Osaka in The company was later restructured as a mutual company in In 1991, the company established a U.S. insurance subsidiary, Nippon Life Insurance Company of America (NLIA), to offer products and services under its own brand, to a growing number of Japanese companies operating in the United States. In February 1997, the company established Nippon Life Insurance Company of the Philippines, Inc. (NLP) as a joint venture with the Yuchengco Group, one of the biggest financial groups in the Philippines. In April of the same year, Nippon acquired a stake in a Thai insurer, Bangkok Life Assurance Limited. In January 2003, the company announced the establishment of China based, Nissay-SVA Life Insurance Co. Ltd., in a joint financing agreement with SVA (Group) Co. Ltd., a major consumer electronics manufacturer in China. Two months later, in March 2003, the company introduced Shin Ikiru Chikara EX, which is the first product in the life insurance industry to offer coverage for the re- 82

84 occurrence of three major illnesses in Japan: cancer, apoplexy and cardiac infarction. The insurance policy provides for long-term medical treatment. SWOT analysis Figure 8.9: SWOT analysis of Nippon Life Insurance Company Strengths Weaknesses Maintaining its strong position in the Japanese market Strong risk management strategies Leadership position in Japan Exposure to equity markets, especially the US and Japan Competitive market in Japan Problems with solvency margin ratio Opportunities Threats Continue its expansion in Asia Deregulation in financial services Acquire to enter new markets Produce more products and improve services Deflation, low interest rates and drop in share prices Risky investment decisions Source: Author analysis Business Insights Strengths Maintaining its strong position in the Japanese market: despite the problems the Japanese economy is facing at the moment, namely low interest rates, stagnation and deflation, the company has been able to maintain reasonable growth in the recent years. Nippon Life managed to maintain its strong 20% market share in the Japanese life insurance market. 83

85 Strong risk management strategies: the company has a strong direct management strategy and an effective risk management strategy, where the independent risk management unit acts independently from other departments. This adds security to the business and at the same time attracts new investments, especially in view of the regulations regarding the illegal activity in the financial services industry. Leadership position in Japan: Nippon Life Insurance Company is Japan's largest life insurer and throughout its history the company has developed strong brand awareness and brand loyalty. This strong brand is the key reason why the company has been able to sustain its growth in view of the current economic stagnation in Japan. The fact that the name is well established means that Nippon Life has a greater chance of surviving recessions and related difficult times than many of its competitors. Weaknesses Exposure to equity markets: the company is over exposed to the United States and Japan and does not have enough exposure to emerging markets or established markets in Europe. Both the UK and United States are strongly involved in equity markets, which means any gains will be enhanced but so will losses. As is currently evident, the company is fighting difficult economic conditions, and with the current exposure, it cannot transfer or re-direct efforts to different markets. If it wishes to remain competitive within the Japanese market, it needs to look out for more diversification. There are signs that the company is now being more cautious. Nippon Life reported in July 2004 that it is now reducing its exposure to foreign bonds, especially in the U.S. market. Competitive market: Nippon faces the serious threat posed by other insurers in its domestic market including the major insurance companies such as Sumitomo life insurance Company, Mitsui Life Insurance and Dai-ichi Mutual life Insurance Company, non-life insurers entering the life insurance market and foreign competitors. One of the ways the company can ensure it remains competitive is through greater product innovation. Nippon Life has been taking steps in this direction, and in August

86 Nihon Keizai Shimbun announced that Nippon Life Insurance would be the first in Japan to administer the new, 401(k) style defined contribution pension programmes. Problems with solvency margin ratio: although still well above the threshold by which the government would ask the company to take corrective steps, the fact that the company experiences a decrease in the number of individual life and annuity contracts, is worrying for the business. Opportunities Continue its expansion in Asia: despite having a relatively broad geographic spread of offices, Nippon is lacking sufficient exposure in the East Asian region. The primary reason to target the Asian market is the high rate of economic growth expected in the region and the low insurance participation ratio. Growth is expected in the medium to long term and the company has already established a position in a number of markets, including Thailand, Philippines and China. Deregulation in financial services: the company can now diversify its product offering, and recently expanded it by adding nursing and medical services and pension plans. Acquire to enter new markets: the company should seek to expand through acquiring or merging with another firm, particularly if the firm is established in a market Nippon wishes to break into, similarly to how it entered the Thai market (through Bangkok Life Assurance Limited). New acquisitions worldwide will mean that the company would be less dependent on the troubled Japanese market. Launch new products and improve services: in order to remain competitive, Nippon must continue to produce more efficient and consumer friendly products, and offer reasonable returns, especially on products such as pensions. A move in this direction was apparent in March 2003 with the creation of indemnity insurance for the reoccurrence and treatment of the three major illnesses, something that has not yet been 85

87 released in Japan. The company is renowned for the door-to-door approach, yet has not developed strong client skills. In order to attract more customers, it has introduced new distribution channels, including the Internet and telesales. Threats Deflation, low interest rates and drop in share prices: this is one of the major problems for Nippon, and for the whole of the Japanese insurance industry. The market is still depressed, and this is an ongoing threat. The market has been underperforming for the past five years. Risky investment decisions: considering the volatile economic environment, the company is adopting a quite risky position in terms of asset management. The company has decided to invest in alternative funds and private equity funds, with the intention of generating higher returns over the long term. This, however, given the economic circumstances led to the total assets decrease by 15.8% to 5,598 billion in 2003 ($50,660 billion). Company activity snapshot On the August 19, 2004 it was announced that Nippon Life has become the first in Japan to manage more than (k) defined-contribution pension programs. The number of approved plans under its management has risen by 15% from 88 at the end of March 2004 to 102 as of the end of July Since the increase came from a range of businesses employing between 100 and several thousands, the aggregate number of workers whose defined-contribution pension plans were overseen by Nippon Life rose to an estimated 110,000 as of July 31, This means that considering the difficult economic circumstances that Japan is facing at the moment, Nippon Life is trying to expand its product offering, aware of the increasingly competitive market and the fact that pensions are one of its potential gold mines of the future; 86

88 the combined number of salespersons at Japan's nine major life insurers, including Nippon Life Insurance Co. and Dai-ichi Mutual Life Insurance Co., stood at 234,000 at the end of March 31, 2004, a decrease of 6.5% from a year ago, posting the thirteenth consecutive year of decline since the March-end of The combined number, which has declined to about 60% of the peak in the bubble economic period, marked the second-biggest fall since the 7.5% decline in fiscal 1997 when Nissan Mutual Life Insurance Co. went bankrupt. The trend reflects the fact that consumers now have more options for buying policies, including mail-order marketing by foreign life insurers. It also suggests that management approaches traditionally adopted by domestic life insurers, which mobilise a large number of sales staff, have come to a turning point, industry sources commented. This drop in salespersons comes around the same time when Nippon Life has started to expand other distribution channels, namely the Internet and telesales; the top nine life insurers saw their aggregate paper losses on property holdings jump by 23% to billion in fiscal 2003 as land prices continued to decline almost everywhere in Japan. The increase marked the third consecutive year of mounting losses on real estate. Paper losses ballooned at six life insurers, including Nippon Life Insurance Co., Dai-ichi Mutual Life Insurance Co., Sumitomo Life Insurance Co. and Asahi Mutual Life Insurance Co. Fukoku Mutual Life Insurance Co. was the only insurer that saw a paper profit on properties. According to government appraisals as of January 1, 2004 land prices in commercial districts in central Tokyo generally have stopped falling. However, prices in other areas of Japan dropped 6.5% year on year, faster than the previous year. Since life insurers own rental office buildings nationwide, with many located in commercial areas, declining land prices in various regions significantly depressed their values; life insurers' finances improved significantly in fiscal 2003 due to the sharp rise in share prices. Their shareholdings had paper profits of five trillion yen as of the 87

89 end of March 2004 compared with paper losses of 360 billion a year earlier. Since life insurers will likely have to book around half of their paper losses on real estate as impairment charges, any shortfalls from the accounting could weigh down their earnings when asset impairment standards become mandatory in fiscal 2005; Nippon Life Insurance announced that its solvency margin ratio, a key gauge of an insurer's ability to pay policyholders, stood at 893.8% as of March 31, 2004 rising from 630.6% a year earlier on the stock market recovery. Although the closely watched gauge is well above the 200% threshold below which the government requires insurers to take prompt corrective measures, Nippon Life saw its balance of individual life and annuity contracts continue to fall in fiscal 2003; in its earnings report for the year ended March 31, 2004 the largest Japanese life insurer said that life insurance and annuity contracts newly signed with individuals dropped 22.9% from the previous year to 19, billion. The outstanding balance of such contracts came to 278, billion as of March 31, 2004 down 5.6% from a year before. Nippon Life said it had 2, billion in unrealised profits on its shareholdings as of March 31, 2004 sharply up from the billion a year earlier, as a result of a nearly 50% jump in Tokyo stock prices over the year; life insurers are major institutional investors and fluctuations in share prices affect their financial health. Nippon Life said it still had about 290 billion in negative spread between guaranteed returns to policyholders and much lower investment returns on assets in fiscal 2003, although the amount was down from the 320 billion the previous year. Life insurers have been suffering from negative spreads amid sluggish financial margins, undermining their core profits. Nippon Life said its core operating profit, a key gauge of an insurer's profitability, amounted to billion in the reporting year, up 2.7% from the previous year. 88

90 Chapter 9 State Farm Insurance Companies 89

91 Chapter 9 State Farm Insurance Companies Summary State Farm Insurance is a personal lines property and casualty company that provides auto insurance, non-medical health, life, and homeowners insurance. The company has subsidiaries across the United States that sell all types of insurance. State Farm Federal Savings Bank, generally known as State Farm Bank, focuses on consumer-oriented financial products, complementing State Farm's insurance focus on personal lines. State Farm Bank is a non-traditional financial institution, as it does not have branch offices, it uses agents, telephone, mail and the Internet instead. State Farm is the main home insurer in the United States, the company has over 73 million policies in force and about 28 million households are insured with the company. State Farm insures one out of every five automobiles in the United States. State Farm has significant exposure to severe weather, such as windstorms and hail, given its top five market share throughout the United States. Another risk is the fact that the personal lines insurance industry is heavily regulated, which imposes limits on company s ability to alter rates, or products. Overview State Farm Insurance is a personal lines property and casualty company that provides auto insurance, non-medical health, life, and homeowners insurance. The company has subsidiaries across the United States that sell all types of insurance. It also operates State Farm Bank, which provides additional financial services. State Farm Insurance is headquartered in Bloomington, Illinois. 90

92 State Farm Mutual Automobile Insurance Company markets automobile insurance and is the largest insurer of automobiles in the United States, insuring one out of every five automobiles. It also offers health insurance. State Farm Fire and Casualty Company's product lines include homeowners, boat owners and various commercial lines. The company is the United States' largest insurer of homes and pleasure boats. State Farm Florida Insurance Company writes new business in Florida for homeowners, renters, and condominium unit owner's policyholders. State Farm County Mutual Insurance Company of Texas protects higher-risk motorists in Texas. State Farm Federal Savings Bank, generally known as State Farm Bank, focuses on consumer-oriented financial products, complementing State Farm's insurance focus on personal lines. State Farm Bank is a non-traditional financial institution, as it does not have branch offices. The bulk of communication between the bank and its customers is through agents, supported by telephone, mail and the Internet. State Farm Investment Management Corp. manages the State Farm Mutual Funds and the investment options for State Farm Variable Products. It has over 30 years experience managing investment company assets. State Farm VP Management Corp. is the broker-dealer for State Farm Mutual Funds and State Farm Variable Products. For the fiscal year ended December 2003, State Farm Insurance reported revenues of $56,100 million, an increase of 12.88% from the previous fiscal year. In the same period, net income rose from $-1,994 million to $1,468 million. History George J. Mecherle started State Farm Insurance in 1922 as a small mutual automobile insurance company owned by its policyholders. In 1928, Mecherle decided to decentralise the company. Employees from the Bloomington, Illinois office, along with 91

93 other employees hired in Berkeley, California, established the company's' first branch office at this time, which provided support for agents and brought service closer to the customer. Over the years the company prospered, adding new subsidiaries in various states across the US. Company subsidiary, State Farm Fire and Casualty was started in 1935, to provide insurance for homeowners, and boat owners among others. Another subsidiary, State Farm Life and Accident Assurance, began offering life and accident insurance in 1961, to meet the demand for life insurance in New York, Connecticut and Wisconsin. In the same year, it started the State Farm County Mutual Insurance Company of Texas, to protect higher risk motorists in that state. In April 2003, State Farm released seven savings strategies to help middle-income Americans get started with savings. State Farm developed the list in response to data from the 2003 Retirement Confidence Survey, produced by the American Savings Education Council. Taking advantage of its extensive claims data, State Farm announced in November 2003 that it was implementing its annual vehicle insurance ratings for specific makes and models of vehicles. 92

94 SWOT analysis Figure 9.10: SWOT analysis of State Farm Insurance Strengths Weaknesses Major US property and casualty insurer Extensive distribution network Risky factors, wheather weather and equity markets Home insurance, construction, replacement, repair costs Higher property prices and inadequate r Replacement cost Mutual status means lack of ability to raise capital Opportunities Threats Strong US brand name Cost cutting management Small business insurance Rates increase too high New regulations Competition Source: Author analysis Business Insights Strengths Major U.S. property and casualty insurer: State Farm is the main home insurer in the United States, the company has over 73 million policies in force and about 28 million households are insured with the company. One out of every five automobiles in the United States is insured by State Farm, meaning that State Farm is the main car insurer in the country. The company is licensed to sell insurance products in all 50 states, an advantage over other insurance companies operating there. Wide distribution network: State Farm has about 76,000 employees working across the United States and Canada and nearly 17,000 agents who are trained to sell State Farm 93

95 insurance products and 58,000 staff members. However, the company had to close some of its offices, including the Winter Haven office. Weaknesses Risky factors, weather and equity markets: State Farm has significant exposure to severe weather, such as windstorms and hail, given its top five market share throughout the United States. Another risk is the fact that the personal lines insurance industry is heavily regulated, which imposes limits on company s ability to alter rates, or products. Additionally, State Farm is exposed to equity market volatility and it has asbestos exposure in discontinued operations, which further increases the risk the business faces. The exposure to equity markets was one of the reasons why the year 2001 experienced the largest underwriting loss ever. The year 2003 saw some improvements, and the property and casualty ratio for State Farm has improved, by moving from 125.1% in 2001 to 100.6% in Home insurance, construction, replacement, repair costs: homeowners insurance is facing some difficulties at the moment, due to the fact that according to some insurers, it is now increasingly used like a warranty product, rather than protection against sudden and accidental losses. Competitive actions over the course of previous years, such as offering low deductibles and inadequate exclusions for mould or water damage claims in the policy form, contributed to the lowered threshold for filing a claim affecting all homeowner insurers. At the end of 2002 the company announced an unexpected increase in homeowners insurance rates by an average 5.2%. According to State Farm, although mould and water claims are starting to stabilise now in the homeowners insurance market, construction, replacement and repair costs are increasing. Higher property prices and inadequate replacement costs: real estate prices inflated well beyond the values upon the value on which the policy pricing was based. This "replacement cost shock" was a particular problem for insurers whose product routinely guaranteed replacement cost repayment. Although rising interest rates and poor 94

96 economy have slowed the real estate prices in as in the mid- to late 1990s, the company is likely to experience more problems in this area. Mutual status means lack of ability to raise capital: State Farm insurance is a large mutual insurance company, which means that it is owned by its policyholders. However, the mutual status restricts the potential for development transparency of its operations and it means that the company is unable to raise capital by selling stocks, which can be used for funding growth and paying for acquisitions. Opportunities Strong U.S. brand name: State Farm has been in the insurance business for over 75 years and during this time the company has grown from a small farm mutual auto insurer to one of the world's largest financial institutions. Further, its customer oriented service, strong distribution network in the United States and positive financial ratings all contribute to its brand image, which can be leveraged suitably. Cost cutting management: State Farm decided in 2001 to restructure the organisation from 25 regions to 13 zones, planning to create an infrastructure that realises greater efficiencies in business processes. Expense reduction efforts were focused on analysing zone and corporate processes. In 2002, workforce was reduced by more than 2,800. Further expense savings occurred during 2003 and are expected to continue through Small business insurance: having noticed a significant growth in the number of small businesses being set up, especially during 2002 and 2003, State Farm Insurance decided to focus on this growing market. The U.S. Census Bureau reports small businesses with 10 or fewer employees are growing at a much faster rate than the economy at large. Hence, this is a key component of State Farm's growing business initiative. 95

97 Threats Rates increase too high: State Farm has continued to increase auto and fire rates in most parts of the country since 2002 to bring them more in line with rapidly increasing claim costs. It was decided that homeowners insurance rates will increase by an average 5.2% and the company would raise its automobile rates by an average of 9.2% state-wide. According to State Farm, it is due to the increasing costs in construction, replacement and repair. The property and casualty insurance is highly competitive in the United States and price increases may affect the new business generated, especially if other insurers will be offering products at more competitive prices. New regulations: examples of new laws which had a direct impact on State Farm insurance business include Gramm-Leach-Bliley Act (The Financial Modernization Act of 1999, which includes provisions to protect consumers personal financial information held by financial institutions), the Health Insurance Portability and Accountability Act (HIPAA of 1996 protects health insurance coverage for workers and their families when they change or lose their jobs) and the Terrorism Risk Insurance Act (Terrorism Risk Insurance Act of 2002 establishes a temporary federal Terrorism Insurance Program that provides for a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism, in order to protect consumers by addressing market disruptions and ensure the continued widespread availability and affordability of property and casualty insurance for terrorism risk). Further, laws on potential repeal of estate taxes can affect the life insurance business. Competition: the markets for motor and homeowners insurance in the United States are highly competitive. Although State Farm is one of the strongest brands in the United States, the recent increase in prices means that it now might be faced with more fierce competition. 96

98 Company activity snapshot State Farm Insurance announced the closure of its Winter Haven office in April The company said it would shut its Winter Haven subrogation operations and transfer 67 jobs to four other corporate offices, the closest one in Jacksonville. By combining 38 separate units into four offices, State Farm is aiming to provide improved efficiency for its clients. The Winter Haven office, which serves as the Florida zone headquarters, lost 298 jobs through cuts and transfers since March 2003, when the company announced it was moving 219 life insurance positions out of Winter Haven into four main offices. This move forms part of the cost cutting measures introduced to boost efficiency in the business, after the company experienced significant losses in 2002; State Farm Insurance and Blue Cross/Blue Shield insurance are among the top 10 world-class financial services/insurance brands according to a Harris Interactive EquiTrend brand study, published in November Both companies improved their ranking positions from spring 2002 survey. Blue Cross/Blue Shield moved up to its No. 9 position from No. 18 and State Farm moved to No. 8 from No. 9. The study measured quality, which is the percentage of people who feel aware and informed enough about the brand to rate it. Approximately 2,900 respondents rated each brand out of a total of 1,152 brands measured; in December 2002 State Farm announced an increase in its automobile rates by an average of 9.2% state-wide, while homeowners insurance rates increased by an average 5.2%. The company explained that that even though mould and water claims are starting to stabilise in the homeowners insurance market, construction, replacement and repair costs are increasing. State Farm sells a new policy that does not cover mould, slow water leaks or foundation damage unless a customer pays extra, and according to the company, most people are not purchasing the additional coverage. State Farm also said that even though some parts of the state will see a rate increase, rates will drop in other areas. 97

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100 Chapter 10 Aviva Plc 99

101 Chapter 10 Aviva Plc Summary Aviva is the world's seventh largest insurance group and is the largest insurer in the UK. The company offers are long-term savings accounts, fund management and general insurance. While half of Aviva s business comes from the UK, it also has presence in France, the Netherlands, Spain, Italy, Ireland, Canada and Australia. Aviva operates through its subsidiaries under names such as Aviva, CGNU, Norwich Union, CGU, Morley Fund Management and Delta Lloyd. The markets of Italy, Spain and Netherlands have proven to be most profitable because of strong bancassurance distribution partnerships, which in turn increased Aviva s life insurance sales. One of the problems Aviva faces is high level of debt. As on fiscal year end in 2003, the company had about $2.8 billion of subordinated debt, which in turn sets limits on the financial flexibility of the company. Overview Aviva is the world's seventh largest insurance group and is the largest insurer in the UK. The company offers long-term savings accounts, fund management and general insurance. The group, headquartered in London, employs approximately 56,000 employees and has about 30 million customers worldwide. While half of Aviva s business comes from the UK, it also has presence in France, the Netherlands, Spain, Italy, Ireland, Canada and Australia. Aviva operates through its subsidiaries under names such as Aviva, CGNU, Norwich Union, CGU, Morley Fund Management and Delta Lloyd. 100

102 The company's savings business provides long-term savings products, pension products, investments products, life assurance and health insurance. In the UK, the group provides these services mainly through its Norwich Union subsidiary. Norwich Union Life has bancassurance agreements with the Royal Bank of Scotland, partnerships with Tesco and Age Concern. Its other brand names include Yorkshire Insurance, Fidelity Life and Provident Mutual. The company specialises in private motor insurance and small business insurance. Norwich Union Insurance sells insurance through brokers, corporate partnerships and also has retail direct distribution channels. During the fiscal year 2003, Aviva's premium income was $52,954 million in 2003, an increase from $50,843 in History Aviva is a result of a merger between CGU and Norwich Union in The company was renamed Aviva after having been known as CGNU. Norwich Union was founded in 1797 and adhered to a policy of growth through acquisitions and geographic expansion. The company went on to include life, marine and motor insurance in its portfolio of operations. In 1959, the company acquired the Scottish Union and National Insurance Company. CGU was formed as a result of the merger between Commercial Union Fire Insurance and General Accident in Commercial Union was initially formed in It merged with North British Mercantile and Northern and Employers Assurance in the 1960s as a way to counter the increased competition in the United States. Increasing competition in the UK led to a reorganisation and merger with General Accident in 1998, leading to the creation of CGU. 101

103 After the merger, the company started offering personal pension plans and also formed alliances to enter new markets in Italy and India. Later in 2000, the company merged with Norwich Union. The merged company's businesses included life and pensions, retail fund management and general insurance businesses and operated under the CGNU name. CGNU entered into bancassurance agreements in Spain and later in 2002, it had similar agreements in France, Italy, Netherlands and Hong Kong. In 2002, CGNU changed its name to Aviva, although the Norwich Union name was retained. The company has since then expanded its overseas operations, more recently into India to include insurance brokerage as a part of its operations in In April 2004, Aviva also announced the extension of its bancassurance channel to Italy. SWOT analysis Figure 10.11: SWOT analysis of Aviva Strengths Weaknesses Strong distribution channels Strong position in Europe High levels of debt Decreasing sales in the UK life insurance market Bancassurance deals finaced financed through internal through debt internal debt Opportunities Threats Bancassurance Expansion in Asia Define its strategy in Asia Fierce competition Changes in solvency rules Source: Author analysis Business Insights 102

104 Strengths Strong distribution channels: Aviva in the UK sells its products through independent financial advisers (about 48% of the new business sales worldwide in 2003), own direct sales channel (23%), bancassurance partnerships (25%) and through other partnerships (4%). The markets of Italy, Spain and Netherlands have proven to be most profitable because of strong bancassurance distribution partnerships, which in turn increased Aviva s life insurance sales. Strong position in Europe: Aviva is the largest insurance company in the UK with a market share of about 11-12% and one of the largest in Europe. The company distributes insurance products in the UK, and it enjoys top-five market positions in the Netherlands, Spain, Singapore and Turkey. Aviva is also the second-largest UK-based fund manager and is amongst the top five players in the Netherlands and Australia. This means that Aviva has diversified product offering which in turn makes the company more capable of absorbing potential changes in the market. Weaknesses High levels of debt: one of the problems Aviva faces is high level of debt. As on fiscal year end in 2003, the company had about $2.8 billion of subordinated debt, which in turn sets limits on the financial flexibility of the company. Other companies with lower level of debt have a more flexible capital structure and therefore have a competitive advantage over Aviva. Decreasing sales in the UK life insurance market: UK life and pensions sales decreased between 2001 and 2003, which is one of the main problems the company faces at the moment. Other insurers, however, have also experienced such decline, and the recession of 2001 and 2003 can be partially blamed for the problems. Another reason is the high level of debt that means the company is less competitive, which in the increasingly more consolidated market can be risky. 103

105 Bancassurance deals financed through internal debt: Aviva has financed its bancassurance deals (having spent 1.8 billion in pursuing its bancassurance strategy) between 2000 and 2003 through what it calls internal debt and as at the end of fiscal year 2003, internal debt accounted for 3.8 billion of Aviva's 20.5 billion of capital employed. The group also raised significant subordinated debt. Bancasurrance deals form an important part of Aviva s business strategy and can be profitable, however the company risks some serious shortfalls in capital should some of the deals fail. Opportunities Bancassurance: this is exceptionally strong in some European markets, including France and Spain. Many European insurers have either been investing in bancassurance deals or are planning to do so. Aviva has pursued the strategy of investing in bancassurance and now has partnership agreements with ABN Amro in the Netherlands, UniCredito in Italy and other strong arrangements with banks in Spain. These bancassurance deals have saved Aviva from experiencing a further decrease in life insurance sales. Aviva also formed a bancassurance partnership with Credit du Nord, by which Aviva gained access to 1.3 million customers through more than 600 branches, making the company the only life insurer present in all distribution channels in France. Define its strategy in Asia: Aviva decided to take advantage of the growing Asian markets by investing in Singapore, Malaysia, Thailand, Indonesia, Hong Kong, the Philippines and Marianas, Macau and Taiwan. However, in September 2004 the company decided to sell its Asian insurance business to Mitsui Sumitomo Insurance, Japan's second biggest insurer. Aviva explained this move by its new strategy to concentrate in China instead and the company opened two new life offices, in Beijing and Chengdu, China, at the end of September 2004 to operate alongside the office it opened in Guangzhou in January Aviva s move is no different to what its competitors are doing - because of its strong growth; the Chinese market is now the Promised Land for troubled European insurers. 104

106 Threats Fierce competition: Aviva has been trying to expand in countries outside the UK, especially in Italy, where the company sells through Unicredo's regional Cassa di Risparmio do Torino network. In France, Aviva started selling through SocGen's Credit du Nord branch network, where it competes against larger Societe Generale network. In Holland, Aviva has a bancassurance deal with ABN Amro and it competes against the largest Dutch providers, ING and AEGON. The main problem with expansion abroad is the local competition, which is typically different to the competition in the home market. Changes in solvency rules: the UK life insurance market is likely to witness structural changes as with the mediation of regulatory bodies, the insurance companies shall have to provide for high solvency capital. Such changes in solvency rules would force Aviva to make changes in its investment portfolio thus affecting overall returns on these investments. Company activity snapshot In September 2004 Aviva sold its Asian general insurance businesses in Singapore, Malaysia, Thailand, Indonesia, Hong Kong, the Philippines and Marianas, Macau and Taiwan to Mitsui Sumitomo Insurance, Japan's second biggest insurer. In August 2004 Aviva announced that it planned to place more emphasis on the Asian savings market, while in the past Aviva has concentrated mainly on Europe. Aviva opened two new life offices, in Beijing and Chengdu, China, at the end of September 2004 to operate alongside the office it opened in Guangzhou in January In February 2004 Norwich Union announced the closure of Hill House Hammond. The brokerage sector is struggling as a whole and further consolidation in this field may be inevitable as brokers face up to imminent FSA regulation. The move by Norwich Union will result in 1,200 of the brokers' 1,600 jobs being lost, with the remaining 400 being redeployed throughout Norwich Union. 105

107 In January 2004 Aviva reported a severe slump in pension sales as new individual pension sales fell by 20% in 2003 to 396 million. The insurer blamed the modest 1% per year annual management charge levied on stakeholder pensions for the decline in sales. Poor results are expected across the industry, as other providers will also have experienced difficulties in covering the cost of advice and marketing campaigns with the 1% charging structure. Aviva announced its strongest quarter sales for the fiscal year ending December 31, 2003, generating worldwide sales of 14.4 billion for the period. Although the company's worldwide sales for the quarter were slightly down from the 14.6 billion it generated for the same period the previous year, the company's worldwide total bancassurance sales were up 27% for the period to 563 million. 106

108 Chapter 11 Zurich Financial Services 107

109 Chapter 11 Zurich Financial Services Summary Zurich Financial Services Group specialises in financial protection and asset accumulation. The company is a provider of insurance services for individuals as well as small businesses, corporations and multinational companies. Zurich provides life and non-life insurance, including property, accident, auto, health and financial risk coverage. Zurich is the largest Swiss-based insurance group and a global leader in its field, with offices in more than 60 countries, employing over 70,000 people and serving 38 million customers. The company's principle brands are Eagle Star, Allied Dunbar in the UK, and Farmers and Scudder Kemper in the United States. For the fiscal year ended December 2003 Zurich Financial Services achieved revenues that totalled $48,919 million, an increase from $41,423 million in Life insurance has been at the centre of Zurich s operations, however this sector appears to be the weakest area in Zurich s portfolio. Overview Zurich Financial Services Group specialises in the areas of financial protection and asset accumulation and is concentrated into five business divisions: four geographic (Continental Europe, UKISA/Asia Pacific, North America Consumer/Latin America and North America Corporate) and one global - Centre Group, Zurich Capital Markets and Capital Z Partners. Zurich Financial Services provides insurance services for individuals as well as small businesses, corporations and multinational companies. Zurich provides life and non-life insurance, including property, accident, auto, health and financial risk coverage. 108

110 Zurich has grown since the early 1990s thanks to a strategy of expansion involving the acquisition of numerous strategically placed insurance companies. This has allowed Zurich to enter the UK and many Europe markets as well as North America. Zurich is the largest Swiss-based insurance group and a global leader in its field, with offices in more than 60 countries, employing over 70,000 people, and serving 38 million customers. The company's principle brands are Eagle Star, Allied Dunbar in the UK, and Farmers and Scudder Kemper in the United States. Zurich also works with a number of partners worldwide. Deutsche Bank offers Zurich's insurance products to its clients in exchange for Zurich offering its customers Deutsche's Banking and Asset Management services; an agreement implemented throughout a number of European countries. Another example of Zurich North America s partnerships is the strategic alliance with ING. Together they underwrite commercial and corporate lines distributing products through approximately two-thirds of all Canadian brokerages. For the fiscal year ended December 2003 Zurich Financial Services achieved revenues that totalled $48,919 million, an increase from $41,423 million in History Zurich Financial Services Group dates back to the 19th century, with the founding in 1872 of Zurich Insurance Company. Within eight years of its founding, the company was already servicing a large clientele beyond Switzerland and in 1912 commenced its operations in the United States, originally in the field of workers compensation. In 1923, the company opened a branch in the UK. These activities were the start of Zurich's almost continual trend of global expansion. 109

111 The following year, the company changed its name to Zurich Financial Services Group following the merger with the financial services business of B.A.T Industries. Through a dual holding structure, Zurich Financial Services was 57% owned by Swiss-quoted Zurich Allied, representing the former shareholders of Zurich Insurance, and 43% by London-listed Allied Zurich, the demerged financial services interests of B.A.T Industries was a difficult year for Zurich with profits falling and investors pulling out. In an effort to stabilise the situation, the company sold asset manager Zurich Scudder to Deutsche Bank. In September 2002 Zurich announced its $2.5 billion rights issue had been fully underwritten, by banks Credit Suisse First Boston, Goldman Sachs, Schroder Salomon Smith Barney and UBS Warburg, as the insurer struggled to restore its balance sheet. The company completed the sale of Threadneedle Asset Management Holdings Ltd to American Express Financial Corporation in June The transaction value of approximately 340 million (approximately $565 million at current exchange rates) was paid in cash on completion. Zurich announced in November 2003 the completion of the sale to Swiss Re of the closed business of Zurich Life Assurance Company, one of Zurich's UK life businesses. In December 2003 the board of directors of Zurich Insurance Company and Alpina Insurance Company approved to merge Alpina into Zurich. 110

112 SWOT analysis Figure 11.12: SWOT analysis of Zurich Strengths Weaknesses Global presence Valuable strategic alliances Life insurance operations Legacy problems Opportunities Threats Cost - reductions UK wealth management Divestment Global equity market Further asbestos litigation Source: Author analysis Business Insights Strengths Global presence: Zurich has a presence in 60 countries globally and a strong focus on the key world markets of the UK, United States and Switzerland, with expanding operations in continental Europe. Zurich is the UK's third largest household insurer in terms of gross earned premiums. Valuable strategic alliances: Zurich has entered a number of strategic partnerships, including deals with Deutsche Bank, Bank of America, Ulico Insurance Group, ING Groep, HBOS and Blue Cross of California. Thanks to these alliances Zurich has been offered opportunities for expanding its customer base and strengthening its brand name. 111

113 The development of recent strategic partnerships with Bank of America, Ulico and HBOS plc offer substantial opportunities to further expand the company's customer base. Theoretically, the deals expand Zurich's reach to a further 50 million customers. Weaknesses Life insurance operations: life insurance has been at the centre of Zurich s operations, however this sector appears to be the weakest area in Zurich s portfolio. The Life group is exposed to the less interesting markets in Europe and profitability has been low. The competition Life has been facing, namely Axa, ING, Aegon, Generali and Prudential, means that it is increasingly difficult achieve profitability in this sector. Opportunities Cost-reductions: according to Zurich, cost-reduction could help in recovering financial strength, in light of recent losses. The cost-cutting and streamlining process has already begun, following from initiation of a strategy of consolidation and strategic reorientation in Funds from the divestiture and streamlining of Zurich's asset management businesses are being used to expand its new insurance operations in Europe. UK wealth management: Zurich has launched a UK high net worth division called Zurich Private Client. Zurich Private Client covers individuals with homes of 750,000 and upwards with contents of 250,000. It has attracted a number of high-profile celebrities and according to Zurich this sector is still growing. Zurich has also entered the market first, ahead of competitors Groupama and Lloyds TSB and stands to benefit from the wealth of experience and familiarity with the sector that it has gained through recruiting a number of Independent's high net worth team. Threats Divestment: Zurich has expressed the intention to divest itself of operations that do not fit in with its new goals and objectives. However, in order to divest, the company needs to find buyers, and in view of the financial problems that many financial services 112

114 companies are still facing, it might prove to be difficult. Moreover, as potential purchasers are well aware of Zurich's desire to divest quickly, full market value of these outgoing businesses may not be attained. Global equity market: Zurich has experienced significant declines in the group's total equity, with its share price declining drastically. Because of the nature of its business the company will continue to be exposed to equity, therefore any fluctuations in global equity markets will have a direct impact on Zurich s performance. Company activity snapshot Computer Sciences Corporation has signed on July 27 th an IT outsourcing deal with Zurich Financial Services worth an estimated 700 million. Under the terms of the global agreement, CSC would provide a range of applications development and maintenance services to support Zurich in North America, Germany, Switzerland and the UK. Zurich's first quarter 2004 results provide further confirmation that the insurer s performance has been improving. Zurich earned a net income of $702 million in the first quarter of 2004, up from $134 million for the same period the previous year. This comes on the back of a full year net income of $2.1 billion for 2003, providing concrete evidence that Zurich is back on track after a couple of tough years. The turnaround is the result of a radical restructuring plan set out by the company s chief executive, which involved the sale of its non-core businesses, including the UK asset manager Threadneedle, the reduction of headcount by 4,500 and a re-focus on the general insurance business. This has enabled Zurich to shore up its balance sheet and increase profit margins by scrapping under-performing business units. The company can now move on to the second stage of restructuring. This involves achieving a target of 12% return on equity based on business operating profit and stripping out a further $200 million of costs this year. Zurich has done well at cost cutting in the past; however, the 12% profitability target may be harder to achieve depending on 113

115 how quickly the general insurance market softens. Some lines, such as property insurance in the United States, have already started to soften, which is a sign that other lines will follow. This will put pressure on Zurich to achieve profitability in its general insurance division, which accounts for the majority of the group's profits. Zurich issued its $1 billion bond in September 2003, as the company is seeking to consolidate after its expansion program. Zurich Financial Services has joined the ranks of insurers looking to bolster their positions with a bond issue. The Swiss group said that it would access cash through the debt market with a $1 billion bond issue that would help to strengthen its finances and restructure debt. The company is trying to rebuild both its balance sheet and its reputation following an ambitious expansion program that went wrong. The firm has committed to concentrating on profitable businesses and to this end has divested operations in France, the Netherlands, Indonesia and the UK. This policy has served Zurich well so far - the company returned to profit in the first half of 2003 and undertook a $2.5 billion rights issue. Life insurers have been hit hard by weak consumer demand and falling stock markets, which have forced them to cut bonuses. Improvements in stock markets over the last few months have provided hope of a turnaround. 114

116 Chapter 12 The Dai-ichi Mutual Life Insurance Company 115

117 Chapter 12 The Dai-ichi Mutual Life Insurance Company Summary Dai-ichi, headquartered in Tokyo, Japan, provides individual and group life insurance and group pension products as well as offering asset management and risk management services. Dai-ichi operates internationally and has signed bilateral agreements for reinsurance with large insurance companies all over the world. The company's reinsurance partners are based in the UK, Germany, France, Australia, Hong Kong, Taiwan, Singapore, Philippines, Thailand, Malaysia and Indonesia. Dai-ichi is one of the largest insurance providers in Japan, selling a wide range of life insurance, non-life insurance and pension products to individuals and to groups through its vast network of 48,000 representatives. By the end of fiscal 2003, there were about 9.06 million Dai-ichi individual life insurance policyholders. Overview Dai-ichi, headquartered in Tokyo, Japan, provides individual and group life insurance and group pension products as well as offering asset management and risk management services. The company has five overseas offices located at New York, London, Hong Kong, Beijing and Taipei. Dai-ichi is one of Japan's largest insurers. The company has also expanded into the sale of non-life products, including auto insurance through a partnership with Yasuda Fire. The company has developed an overseas presence through a collaborative deal with AFLAC (American Family Life Insurance Company), the U.S. insurer. It also operates a handful of overseas subsidiaries and has a joint venture with IBJ Asset Management, called DLIBJ Asset Management (DIAM) through which, it provides asset management services. 116

118 Dai-ichi operates internationally and has signed bilateral agreements for re-insurance with large insurance companies all over the world. The company's reinsurance partners are based in the UK, Germany, France, Australia, Hong Kong, Taiwan, Singapore, Philippines, Thailand, Malaysia and Indonesia. For the fiscal year ended March 2004, The Dai-ichi Mutual Life Insurance Company achieved revenues that totalled 5,090.4 billion ($46,990 million) - a decrease of 4% against the previous years revenues of 5,255.9 billion. Reduced insurance premiums and lower revenues from group pensions were some of the key reasons behind the fall in overall revenues. Dai-ichi sold 1.38 million life insurance and individual annuities in 2003, an increase of 3.8% compared to fiscal The company is in a strong position to launch new products on a consistent basis and leverage its competitive position in the Japanese insurance sector. History The Dai-ichi Mutual Life Insurance Company was the first Japanese mutual life insurance company. The head office was shifted to its current location in Tokyo in 1938, which served as the Occupation Forces' general headquarters following World War II. In 2002, to celebrate its 100th anniversary the company launched two new products; the Dodo Jinsei plan, which provided customers with freedom and flexibility and allowed customisation. And, the Yuyu Jinsei plan, launched simultaneously, was primarily intended to meet the nursing and medical needs of middle seniors. In October 2002, the Ikiteku plan was introduced, which offered enhancements, including the ability to utilise part of the cash-value of the whole life insurance to pay for policies that provide death and hospital benefits. Dai-ichi drafted a new reform policy in fiscal 2003 for improving its performance in all fronts. 117

119 The company announced its intension to issue 10 year subordinated bonds (dollar denominated) primarily targeting U.S. and European institutional investors, in March This is expected to benefit the company by around 30 billion. SWOT analysis Figure 12.13: SWOT analysis of Dai-Ichi Strengths Weaknesses Strong position in the home market Partnerships New products Lack of other sources of income apart from premium income Lower loan collections Opportunities Threats Structural Reform Expansion into group life insurance market Reinsurance Stagnant Japanese economy Strong competition Source: Author analysis Business Insights Strengths Strong position in the home market: Dai-ichi is one of the largest insurance providers in Japan, selling a wide range of life insurance, non-life insurance and pension products to individuals and to groups through its vast network of 48,000 representatives. By the end of fiscal 2003, there were approximately 9.06 million Dai-ichi individual life insurance policyholders. 118

120 Partnerships: Dai-ichi has strengthened its position in the Japanese market by entering into several global alliances with major companies in the insurance industry to expand its presence in the international market. In 2000, Dai-ichi partnered with Yasuda Fire and Marine Insurance Co., Ltd. and entered into a marketing alliance with American Family Life Assurance Company of Columbus (AFLAC) and Sompo Japan Insurance Inc. As a result of these alliances, sales of non-life insurance tie-up products reached 420,000 and about 1,670,000 cancer and life-insurance tie-up products were sold in fiscal New products: Dai-ichi has been working on improving its potential by continuously introducing new products, making sure these products are flexible and continually meet the needs of the increasingly more demanding customers. The new products launched include life insurance products such as 'Ikiteku Plan' (Plan for the Future) and 'Yuyu Jinsei' (Calm Life) Plan, to serve the nursing care needs of the middle-aged population. It also upgraded the existing products according to the clients demands. Weaknesses Lack of other sources of income apart from premium income: the company receives the majority (about 70%) of its total revenues from premium income, and only 30% from net investment income and fee income. This means that the company is overly dependent on its premium income and therefore vulnerable to negative economic conditions. Should the economic conditions deteriorate, the company, faced with smaller number of renewals and new business is likely to see its income decline sharply. For example, in fiscal year 2003, the premium income declined by 12.2% over 2002 which caused the decline in the company's revenues by 2.6% to billion. Lower loan collections: Dai-ichi reported decline in its total loan collections in 2003, with overseas loans reporting a 10% decline and home loans experienced an 11% decline. Also, consumer loans declined 2% reflecting the company's inability to capitalise on the prevailing low interest rates. 119

121 Opportunities "Structural Reform": Dai-ichi drafted a new reform in fiscal 2003 in order to improve its performance, reduce costs and boost profitability. All the measures implemented so far have already resulted in a 4.7% decline in operating expenses in fiscal 2003 to billion, however the company hopes that the cost cutting measures will eventually improve its earnings in the near future. Expansion into group life insurance market: Dai-ichi reported a 3.2% increase in group products in 2003 as the company decided to enter the niche employee-funded group life insurance sector. As a result of these efforts, Dai-ichi's group insurance products increased by 3.2% in fiscal 2003 amounting to 54.2 trillion. At the same time, the company started a consulting service for the pensioners to provide retirement solutions and to improve the company's pension funded assets. Reinsurance: in Asia, Dai-ichi has expanded its reinsurance business to include approximately 13 firms across five countries. Dai-ichi has entered reinsurance agreements with the some major insurance companies such as PPP Healthcare (UK), AMP (Australia) etc., which are expected to enhance its prospects in the reinsurance sector. As Japanese companies are becoming more global, the demand for reinsurance assistance is expected to increase in future Threats Stagnant Japanese economy: the Japanese economy is faced with a severe economic circumstances; ongoing stagnation and a collapse in stock prices. Unemployment has resulted in lower levels of household income, which in turn has posed a severe burden on policyholders. This loss of income means that consumers are cutting down on their expenses including insurance policies. Dai-ichi and other Japanese insurance companies have been experiencing a steady decline in number of policies sold and also a greater number of policy cancellations. Furthermore, low interest rates and volatility in stock prices in Japan are affecting the investment performance and a combination of these 120

122 factors means that Japanese insurers are faced with exceptionally complex market conditions. Expansion outside of Japan is one possible solution to this problem. Strong competition: the Japanese insurance industry is not only troubled with the stagnant economy and low interest rates, but the competition between the top Japanese insurance is getting more severe, as the market conditions worsen. The life insurance and mutual fund industry in Japan is flooded with major players such as Nippon Life Insurance Company and Sumitomo Life Insurance Company. Competition is a direct threat to Dai-ichi s position in the Japanese market and means that despite decline in growth, the company has to continue to innovate its products and invest. The deregulation of the Japanese insurance market in 1996 meant that the Japanese market became even more competitive, since non-life insurers and life insurers can enter each other s markets and compete. Company news In June 2004 Dai-ichi announced that it was considering launching life insurance operations in China and Thailand to gain access to these rapidly growing markets. The company plans to move forward with related activities, such as the selection of a local partner. The decision comes as the stagnant Japanese market makes it difficult for the insurers to survive, and after Dai-ichi s major competitor, Nippon Life Insurance has already set up joint ventures in China that began operations last year. Dai-ichi Life has around a1% stake in the country s number two insurer, Ping An Insurance Co. of China. However, the capital interest in the company is purely an investment to gain dividend returns, according to Dai-ichi. If we are to enter the market, it would entail crafting a new framework. Dai-ichi is following the steps of other global insurers who have decided to enter the Chinese market because it offers the strongest growth and is therefore an opportunity to boost performance. 121

123 Chapter 13 Report Conclusions 122

124 Chapter 13 Report Conclusions Summary The events of September 11, 2001 in the United States, followed by the global recession has had a significant impact on the global insurance industry, which will inevitably continue for years to come. At the moment insurers are trying to abandon markets with weak growth and invest in locations where they can recover their losses. China, once a country almost impossible for a foreign insurer to enter has been a member of the World Trade Organisation since 2001 and become a Promised Land to many global insurers. China is an emerging market and is now growing rapidly. Also low insurance product penetration means that there is great potential for insurers to grow. According to analysts, the key for foreign insurers entering the Chinese market is finding a distribution channel, either through a partnership or acquisition of a local partner. The following section outlines the major issues that the global insurance industry faces at the moment, including its road to recovery, problems with stagnation of the insurance industry in Japan, potential for growth in the Chinese market, tougher regulations and bancassurance. Global insurance industry recovers The events of September 11, 2001 in the United States, followed by the global recession have had a significant impact on the global insurance industry, which will inevitably continue for years to come. Global insurers have been coping well with the losses incurred due to the declines in premium income and falls in value of equity across the globe. However, it should be noted that the losses incurred by the global insurance industry have now been estimated at $40 billion to $50 billion. 123

125 Insurers have announced that in spite of the losses, they would be able to recover and most insurers, as indicated in the profiles analysed in this report, are gradually achieving this aim. All of this, however, is happening at a cost. The losses incurred by the insurance industry had to be recovered somehow and a surge in premiums was one of the answers. This in turn means that many businesses around the world are forced to pay more for less protection; even before 2001 non-life insurance rates were forecasted to increase. The declines in global stock markets mean that insurers, now faced with negative returns from their investments, had yet another argument for increasing the premiums. Currently, insurers are trying to abandon markets with weak growth and invest in locations where they can recover their losses. One of the problems is that some insurers with stronger financial records have been able to become more competitive, since it is mainly the struggling businesses that had to significantly increase their premiums. The stronger companies are able to innovate their product offering according to customers demands and cutting costs is not their priority. Japanese stagnation In the past, the Japanese life insurance industry was all about door-to-door sales of policies by agents. Nowadays, however, the market is overloaded with life insurance policies, with many households owning multiple policies. According to analysts at Moody s Investors Service, Japan is an over-insured market, which means that consumers are getting increasingly more demanding and product innovation is crucial. One of the major problems Japan has faced in recent times was the difference between investment returns and yields promised to policyholders. Another problem is the fact that consumers have started to limit their spending on policies as a result of the recession and unemployment, and the industry has witnessed a significant number of cancellations and a decline in new business. This in turn means that insurers have been faced with lower premium income and therefore decline in profitability. Three of the top 10 insurers, Mitsui Life, Sumitomo Life, and Asahi Life, 124

126 have been marked with non-investment grade ratings. Such problems have initiated consolidation, cost cutting and partnerships and some insurers have looked at the options to demutualise, transforming a mutually owned company into a joint stock company. Because of depolarisation, life insurers and non-life insurers have been able to cross-sell their products and expand distribution channels. Dai-ichi Life, for example, formed a comprehensive alliance with Sompo Japan, a non-life group formed by the merger in July of Yasuda Fire and Marine and Nissan Fire and Marine. China, the land of potential China, once a country almost impossible for a foreign insurer to enter is now a member of the World Trade Organisation since 2001 and has become a Promised Land to many global insurers. It is difficult to find a global insurer that is not investing or planning to expand in China - the potential for growth there is enormous. China opened its insurance market to foreign companies on a limited experimental basis in 1992 and by the year 2000 there were only 17 foreign insurers in China. However, by entering the WTO, the opportunities are much wider and gradually all restrictions on the type of products that non-domestic insurance companies could offer are being eliminated. It is forecasted by the Financial Times World Insurance that by 2005 the total business volume will reach $33.82 billion. China is an emerging market and is now growing rapidly. Also low insurance product penetration means that there is great potential for insurers to grow. According to analysts, the key for foreign insurers entering the Chinese market is finding a distribution channel, either through a partnership or acquisition of a local partner. AIG is an example of a company that managed to establish itself in China already in 1919 in Shanghai and in AIG was the first foreign insurer allowed back as China opened the market to foreign competitors. Other insurers are now following AIG s steps and as the profiles 125

127 analysed in this report show, almost all of the global insurers are trying to find their way to the Chinese market and win the share of this precious, fast growing market. Stricter regulations UK insurers are facing tighter regulations in view of the collapse of Independent Insurance few years ago, the commercial insurer, and the problems at Equitable Life, the world's oldest mutual life assurer. The FSA is expanding its monitoring of the insurance industry. Rules are being designed to increase transparency for customers and to strengthen company's reserves. Bancassurance Bancassurance, which means selling insurance products through a bank branch network, is still a key strategy for many insurers. An example of the importance of bancassurance can be seen in Germany with its pension reform. The takeover of troubled Dresdner Bank by Alliaz marked Allianz s attempt to enter bancassurance, however the results of this deal have been small. The acquisition took place when Dresdner faced serious financial problems and Allianz, so far, has been acting more like a rescuer, trying to cut costs at Dresdner. Other bancassurance deals include Munich Re, the world's biggest insurer and Germany's second largest primary insurer, which formed ties with HVB Group, Germany s second biggest bank. Also, Assicurazioni Generali set up an exclusive distribution agreement with Commerzbank, German third biggest listed bank. At the moment, after the lesson learned by the Allianz and Dresdner deal, bancassurance players prefer strong partnerships rather than full-scale mergers. Munich Re claims that its partnership with HVB, although difficult to manage, is cheaper and less risky than the Allianz-Dresdner model. 126

128 127

129 Chapter 14 Appendix 128

130 Chapter 14 Appendix Definitions of distribution channels Intermediary channels: indirect distribution channels utilised by insurance companies, including tied agents, and brokers: tied agents: intermediaries other than company employees, who are remunerated by commission and sell products from one provider. Intermediaries could sell from a company office, door-to-door or by other means, including the telephone; brokers (or multi-tied agents): independent intermediaries selling products from different providers from a company office, door-to-door or by other means, including the telephone. Direct channels: direct distribution channels utilised by insurance companies other than bancassurers, including: Company salesforce: salaried employees selling from company offices, door-to-door or by other means, apart from over the telephone; telephone sales: sales realised by means of the telephone, but not including telebrokers or other tele-intermediaries; direct mail: sales realised by means of direct mail; other: sales realised through other direct channels, such as the Internet. Bank channels: bank distribution networks including: Bank branches of bancassurers: sales realised by means of the branch networks of banks, savings banks and building societies and utilised by bancassurers, namely, insurance companies in which the bank holds a majority stake (more than 50% of its capital); 129

131 banks acting as intermediaries: banks acting on behalf of autonomous insurers or insurance companies in which the bank holds less than 50% of the capital, utilising various distribution channels, including the branch network; other bancassurance channels: all direct or indirect channels utilised by bancassurers other than branch networks. Index Aegon, 112 AIG, 13, 54, 55, 56, 57, 58, 59, 60, 126 Allianz, 12, 16, 17, 27, 33, 34, 35, 36, 37, 38, 39, 40, 41, 51, 127 Alpina, 110 Asahi Life, 125 Asahi Mutual Life Insurance, 87 asset finance, 73 Assicurazioni Generali, 12, 16, 17, 61, 62, 63, 67, 127 Aviva, 12, 17, 56, 99, 100, 101, 102, 103, 104, 105, 106 Axa, 12, 16, 17, 43, 44, 45, 46, 47, 48, 49, 50, 51, 112 bancassurance, 11, 16, 20, 27, 28, 29, 30, 31, 38, 39, 100, 101, 102, 103, 104, 105, 106, 124, 127, 131 Bank of America, 111 Beijing Capital Group, 75, 76 bonds, 66, 84, 118 branch, 75, 76, 77, 90, 91, 92, 105, 109, 127, 130, 131 brokers, 30, 34, 101, 105, 130 building societies, 130 Commerzbank, 66, 127 consolidation, 49, 59, 105, 112, 126 debt, 100, 103, 104, 114 Deutsche Bank, 81, 109, 110, 111 direct mail, 130 distribution, ii, 11, 12, 16, 20, 27, 28, 29, 31, 38, 47, 50, 54, 67, 70, 74, 86, 87, 93, 95, 100, 101, 103, 104, 124, 126, 127, 130, 131 Dresdner, 12, 27, 34, 36, 38, 39, 41, 127 Equitable Life, 127 equities, 30, 49, 66, 68, 72 European Commission, ii Germany, ii growth, 10, 11, 17, 20, 21, 22, 24, 25, 26, 29, 30, 31, 36, 37, 39, 48, 49, 50, 54, 55, 56, 57, 59, 60, 63, 65, 66, 67, 68, 72, 74, 76, 80, 82, 83, 84, 85, 95, 101, 104, 121, 122, 124, 125, 126 HBOS, 111 health insurance, 35, 45, 62, 82, 91, 96, 101 high net worth, 46,

132 homeowner, 94 Independent Insurance, 127 ING, 11, 16, 17, 69, 70, 71, 72, 73, 74, 75, 76, 77, 105, 109, 111, 112 innovation, 84, 125 interest rates, 24, 49, 68, 74, 83, 86, 94, 120, 121 Internet, 55, 70, 71, 74, 86, 87, 90, 91, 130 life insurance, ii, 11, 16, 20, 21, 22, 24, 25, 26, 35, 37, 40, 44, 45, 47, 48, 49, 50, 54, 55, 56, 58, 59, 60, 62, 65, 67, 68, 70, 71, 73, 74, 76, 77, 80, 82, 83, 84, 88, 92, 96, 97, 100, 103, 104, 105, 108, 112, 116, 117, 118, 119, 120, 121, 125 merger, 44, 47, 50, 71, 81, 101, 102, 110, 126 Mitsui Life, 84, 125 Munich Re, 127 Nippon Life Insurance, 17, 79, 80, 81, 82, 83, 84, 85, 87, 88, 121 Norwich Union, 12, 56, 100, 101, 102, 105 online, ii, 37, 81 pension, 22, 31, 37, 41, 60, 71, 72, 85, 86, 101, 102, 106, 116, 119, 120, 127 policyholders, 40, 46, 49, 88, 91, 95, 116, 119, 121, 125 premium income, 11, 17, 20, 22, 24, 30, 31, 37, 55, 63, 65, 67, 76, 101, 119, 124, 125 profitability, 12, 17, 37, 38, 49, 58, 60, 62, 65, 67, 74, 77, 88, 112, 114, 120, 125 property, 12, 22, 34, 37, 44, 45, 54, 56, 57, 58, 59, 70, 74, 77, 87, 90, 93, 94, 96, 108, 114 Prudential, 56, 60, 112 recession, 10, 17, 20, 21, 24, 29, 34, 38, 57, 66, 103, 124, 125 risk management, 84, 116 State Farm Insurance, 12, 17, 89, 90, 91, 93, 95, 97 Sumitomo Life, 87, 121, 125 tied agents, 28, 130 UK, ii unemployment, 125 Yasuda Fire, 116, 119, 126 Zurich, 13, 17, 35, 62, 66, 81, 107, 108, 109, 110, 111, 112, 113,