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“Insurance is not banking” Gerald Harlin, Axa |
INSURANCE GROUP Axa managed to navigate a tough 2008, reporting underlying earnings of €4 billion, down 17% on 2007, but up from 2006, and a record combined ratio of 95.5%. Net income fell over the year, from €5.6 billion to just €923 million. However, in today’s environment and despite an IFRS negative mark to market, it is an achievement to remain in positive territory. Axa’s property and casualty business underpins the firm’s earnings, up 29% on a reported basis from 2007, while the life and savings business was down 44%.
Diversification has been key. The business model at Axa is split between property and casualty insurance, life insurance and asset management. In times of turmoil, the P&C business runs well. The competitors who failed were too focused on one business line or country, or had diversified into areas such as investment banking.
Absolutely. Insurance is not banking, and that has to be highlighted in this current environment. In banking, you don’t invest on a long-term basis. We insurers have long-term commitments, positive cashflows and no or limited refinancing needs and so suffer less in a liquidity crisis. Most European insurers were not doing bank business. Those insurers globally that were have suffered.
First, we are profitable. We haven’t suffered losses, and nor have many of the large insurers with a diversified life and non-life business, so we explain that Axa has a well-balanced business model, and that shareholders are not putting all their eggs in one basket. Hedge funds have been playing in the insurance sector, but there has also been evidence of short coverings since mid-March. Also, following the earnings season, analysts are now looking at earnings capacity in 2009, and discovering that capacity is there. Stock prices appear to be cheap. Investors are seeing the difference between banks and insurers, and I expect more will make the differentiation between diversified insurers and those that are not.
Variable annuities include guarantees that life insurers can reinsure or hedge. With equity markets going down and volatility at an historical high, the cost of offering and covering these guarantees drove profits down, including for our US company Axa Equitable which for many years has been a very successful leader in the variable annuity market. Those questioning Axa’s variable annuities business are often the same who wanted us to dispose of our P&C business a few years ago. The product is good, the key question for policyholders is to be sure their insurer can be a long-term partner. In that sense, maintaining ratings among the best in the industry is important.
Managing portfolios is what insurance companies do best. Matching the assets and liabilities is our game. The vast majority of our assets are in fixed income, and 34% are in government bonds. We had only a 4% exposure to equities, down from 9% in 2007. Through the year we have actively managed programmes of macro hedges to protect our balance sheet and earnings from equity market movements.
Axa has a good solvency level, prudent reserving practices and we have solid cat protection with reinsurers. But we are considering the quality of reinsurers and only working with a few at the moment.
We have the regulatory framework of Solvency II that is being worked on, which will take into account the real risks in the insurance companies and combine the risk on both the assets and liabilities side. Solvency II will also provide companies with the same regulatory framework across countries. It is great, and will offer policyholders increased protection. We can expect some more regulation on the life insurance side. We expect regulation in the US to be introduced at a federal level. For now, insurance is regulated on a state level and it would help to have a level playing field.
Gerald Harlin is a member of Axa’s executive committee and group deputy CFO.
