Steven D. Schwartz, CFA
352 262 3940
The Insurance Services Office released its 2Q09 property/casualty industry results [in late September]. Property/casualty (P&C) net income increased 28.1 percent year over year to $7.1 billion. Net catastrophe losses declined to $4.8 billion in 2Q09 from $7.1 billion in 2Q08.
Underwriting performance improved to a 99.5 percent combined ratio from 104.1 percent in 2Q08. Net investment income declined 9.2 percent year over year to $11.9 billion.
There was a $21.6 billion year over year positive swing in unrealized capital gains on investments as the financial markets recovered. The industry’s annualized return on average surplus rose to 6.3 percent in 2Q09 compared to 4.3 percent in 2Q08.
On September 24, Bloomberg reported that U.S. life insurers were requesting loosened standards tied to souring residential mortgage investments from state regulators. As capital requirements surge, the carriers holding requirement against the slumping assets grew fivefold to $11 billion in the first half of 2009, according to the American Council of Life Insurers (ACLI.) A hearing is planned to assess the regulator’s use of the rating firms.
On September 9, a report entitled The Value of Life in Tough Economic Times was issued by Prudential Financial, Inc. (PRU). The study found that even though 70 percent of people surveyed have cut back on routine expenditures, 93 percent of consumers surveyed consider life insurance a ‘must’. The majority indicated that they find life insurance costs minimal in comparison with other items in their budgets.
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AXA Group: AXA posted solid first-half results with underlying earnings of EUR 2.1bn, beating consensus of EUR 1.8bn and our forecast of EUR 1.9bn. The balance sheet was also solid with solvency rising to 133 percent from 127 percent, and NAV growing by 4 percent. The earnings strength mainly comes from a significant turnaround in the U.S., as expected, highlighting that AXA has largely resolved the challenges facing its variable annuity hedging program.
Less inspiring were the P&C results, where the combined ratio was under pressure, rising to 98 percent from 96.4 percent. However, AXA’s strong life performance more than offset this and should help boost confidence in its earnings power, especially in its variable annuity operations.
On valuation, although AXA has recovered well from its lows, we still believe it is undervalued on a sector-relative basis as shown by its 2009 P/E of 8.4x versus the sector on 10.5x. We have raised our earnings forecast to reflect the H1 outperformance.
AXA has launched a more conservative VA product (New Accumulator 9) with the roll-up rate reduced to 5 percent from 6.5 percent and stricter asset allocation parameters. Further product refinements are expected in coming months.
We have increased our earnings forecast slightly by 2.5 percent to reflect the earnings outperformance reported in H1. Valuation is unchanged at EUR 24.5 per share.
AEGON: We think Aegon will be in a position to repay the Dutch government towards the end of 2010 if economic conditions have stabilized by then. We expect Aegon’s current EUR 3.5bn surplus capital (surplus to S&P’s AA capital requirement) to have grown to EUR 5bn by the end of 2010 as a result of retained earnings alone, providing it with the opportunity to repay the EUR 3bn (remaining EUR 2bn of capital plus EUR 1bn of repayment penalty) at that time.
We believe investors have not given Aegon enough credit for the possibility that it could repay the remaining EUR 2bn (plus the EUR 1bn of repayment penalty) by the end of next year.
We think this is quite possible provided that: Economic and market conditions have stabilized sufficiently so that there is no threat of sudden market collapse; and there is sufficient surplus capital left after the repayment to the government to absorb minor volatility