Credit Crunch Cripples European Insurers’ Profits

August 7, 2008

The global credit crisis tore a hole in the profits of some of Europe’s top insurers on Thursday, with AXA and Aegon both posting lower earnings.

Share reactions were mixed across Europe.

The DJ Stoxx European Banking Index fell 0.6 percent by 0730 GMT, caught between relief over AXA’s declaration that it did not need a capital increase and disappointment over the gloomy results from Aegon and Allianz, whose second quarter profits were both down.

AXA, Europe’s second-biggest insurer, said net profit fell 32 percent to €2.162 billion ($3.35 billion), partly because of writedowns on fixed income assets due to the financial market turbulence. AXA, whose shares rose 6 percent to €21.63 ($33.53) in Paris, also proposed a stable 2008 dividend of €1.20 ($1.86) per share.

Aegon said impairments on U.S. credit and subprime mortgage investments had hurt its second-quarter earnings, and its shares fell while reinsurer Hannover Re also published lower profits. Aegon was down 4.5 percent at €7.88 ($12.21).

Bucking the trend was Britain’s second-biggest commercial insurer, RSA Insurance Group Plc, which eked out a first-half profit rise and its shares rose 1.5 percent in London.

The credit crunch, sparked by losses on U.S. subprime mortgages, has hit insurers around the world. Falling stock markets have affected insurers since many of them hold their assets in equities.

“The main impact on the industry is still on the asset side,” Aegon Chief Executive Alex Wynaendts told reporters in Amsterdam.

Allianz, Europe’s biggest insurer, posted lower second-quarter net profits and abandoned its 2009 profit goal. Allianz shares fell 2.2 percent to €110.83 ($171.78) in Frankfurt.

“It’s a rather difficult sector at the moment,” said Bank Vontobel insurance analyst Uwe Otten. “From a pricing side, the cycle is expected to go down.”

In the United States, American International Group Inc posted its third consecutive quarterly net loss of more than $5 billion on Wednesday [See related article], as it wrote down bad mortgage-related investments, sending its shares down almost 8 percent.

Allianz said late on Wednesday that new guidance was impossible given the financial market turmoil that kept its Dresdner Bank unit firmly in the red in the second quarter.

“We expect this difficult market environment to continue to 2009, therefore our 2006 long-term operating profit growth target of 10 percent compound annual growth rate until 2009 cannot be maintained,” Allianz said in a statement.

AXA said it expected flat 2008 earnings. The French group said its 2008 underlying earnings would be “in line” with those of 2007, provided market conditions did not deteriorate materially.

“AXA’s business strategy is built to withstand severe economic conditions and we remain well positioned to benefit from any upturn in the market environment,” Chief Executive Henri de Castries said.

The DJ Stoxx European insurance sector has fallen around 21 percent so far this year, broadly in line with a similar decline in the FTSE Eurofirst 300 index.

Aegon said it had booked impairments of €98 million ($152 million), which included €57 million ($88.35 million) in impairment on the insurer’s U.S. credit and subprime asset portfolio, as well €26 million ($40.3 million) on U.S. equity investments and €15 million ($23.25 million) in other impairments charges. The impairments, however, were not as high as several analysts had expected, in a range of €150 to 160 million ($232.5 to $248 million).

Aegon CEO Wynaendts said that insurance premium and annuity sales, particularly high-end products, remained strong and provided a solid base. “We are going to weather the storm,” Wynaendts said.

(Additional reporting by Jonathan Gould; Editing by Paul Bolding)

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