Local
Industry anger as NSW adds another levy
The insurance industry has reacted angrily to the NSW Government’s imposition of a new $39 million levy on insurance policies to fund the State Emergency Service (SES).
The levy, announced in the state’s mini-budget by State Treasurer Eric Roozendahl last week, mirrors the controversial fire services levy (FSL) which industry associations have been lobbying to have removed.
Insurance Council of Australia CEO Kerrie Kelly says the new levy – which will come into effect on July 1 next year – is “another unnecessary, inefficient and ill-conceived tax to be paid by general insurance policyholders”.
“In a classic case of cost-shifting, the NSW Government has handed down a budget whereby the cost of running the SES will be picked up by general insurance consumers at an additional estimated cost of $10 per policyholder.”
NIBA CEO Noel Pettersen says the new levy ignores the recommendations of the recent NSW Independent Pricing and Regulatory Tribunal (IPART) report into state taxation, which found the FSL is highly inefficient and creates disincentives to properly insure. The report said the removal of the FSL “should be a priority”.
“The NSW Government’s response has been to add yet another tax on top of the three already added to every premium, this time to fund the SES,” he said.
“Policyholders in NSW already pay world record-level insurance taxes of up to 40 cents in the dollar for their homes and 60 cents in the dollar for their businesses.
“If you don’t insure, you don’t pay for the upkeep of the emergency services and you won’t have to pay this tax,” he said. “There is no way the state can justify this discriminatory tax that will further tempt people to risk their future and underinsure or not insure at all.”
NSW Emergency Services Minister Tony Kelly said in a statement that the new arrangement will provide an estimated $39 million in the first year, “reducing
the direct burden on the State Budget”.
The local government’s contribution to emergency services funding has been reduced to 11.7% and the Government contribution increased to 14.6%.
Mr Kelly says the insurance industry is required to contribute towards the cost of the fire brigades “in recognition of the significant savings in claims on the industry each year from properties being saved by our fire fighters from destruction by fire”.
“Until now, the SES has not been part of this system, despite the insurance industry and the community benefiting from the work of volunteers to help people suffering from damage of storms and floods,” he said.
Also see ANALYSIS.
AIG Australia’s profits up while US parent falters
AIG Australia CEO Chris Townsend has reassured brokers that while US parent AIG has reported large third-quarter losses, the local operation remains profitable.
In a letter to brokers last week, Mr Townsend says AIG’s loss of $US24 billion ($36.3 billion) reflects “a confluence of unprecedented events” rather than the core earnings power of its insurance businesses.
“This is the largest quarterly loss AIG has ever reported which is due, in part, to extreme dislocations and volatility in the capital markets, significant charges related to restructuring actions we have taken, as well as catastrophe losses,” he said.
Mr Townsend says the good news for Australia is that American International Underwriters (AIU), the network of non-US general insurance companies to which AIG Australia belongs, is the only AIG entity to record a third-quarter underwriting profit. AIU reported total underwriting profit, including catastrophes, of $US99 million ($150 million).
“We are proud of that fact, and we are aware that our ability to grow depends on the close relationships we have built with partners like you,” he said.
“Our business is both stable and secure with an asset base that is protected and highly regulated by governments and regulators around the world.”
AIG last week also announced new plans for a restructuring of its financial agreements with the US Treasury and Federal Reserve.
Mr Townsend says the new plans create a more durable capital structure for AIG, reducing existing debt and, by lowering its cost of capital, enable an orderly restructuring of the group’s business.
Senate wants home warranty insurance beefed up
The Senate Economics Committee has completed its eight-month inquiry into last-resort home warranty insurance by recommending better consumer protection measures for the product.
Home warranty insurance is compulsory for new homes built in Australia, and privatised last-resort schemes operate in most states, providing capped cover in the event the builder dies, disappears or becomes insolvent.
In response to claims the product fails to live up to the name, the Senate inquiry has recommended changes to the product, including renaming the cover to avoid misleading consumers.
It also proposes a nationally harmonised scheme of consumer protection in domestic building. The scheme would promote sound builder disciplinary procedures, quicker dispute resolution and add a fourth trigger to the insurance based on the builder’s loss of licence.
The committee recommends the Council of Australian Governments and the Ministerial Council on Consumer Affairs pursue a nationally consistent scheme to report home warranty insurance in detail.
Committee members suggest home warranty insurance be placed on the National Claims and Policies Database to placate demand for better public reporting of the product.
Insurers are also asked to provide consumers with better product information.
Some consumer and builder advocates are annoyed the inquiry didn’t go further and axe the mandatory scheme altogether.
The inquiry received 125 submissions, many from consumers dissatisfied with home warranty insurance after paying several thousand dollars for the product.
Green Senator Christine Milne says the overwhelming majority of submissions and evidence “confirmed that the product is fundamentally flawed”.
Consumer Action Law Centre Director Nicole Rich commended the proposed consumer protection improvements but questioned a lack of detail and timetable for implementation, and Builders Collective of Australia President Phil Dwyer told insuranceNEWS.com.au the committee “did nothing” to resolve the issue.
Victorian Liberal Party Northern Metropolitan member Matthew Guy told insuranceNEWS.com.au he is now pushing for a State Government inquiry into builders’ warranty cover.
KPMG defends itself over Westpoint claims
KPMG has until next March to give its defence over the auditing of Westpoint companies as it takes on the Australian Securities and Investments Commission (ASIC) in court.
The Victorian Supreme Court has ordered KPMG to submit its defence to the corporate regulator’s claims of negligent conduct, while ASIC has been told to expand on its statement of claim before both parties return to court on March 13.
ASIC alleges KPMG failed to identify issues relating to the continuing solvency of eight companies between 2002 and 2004 and failed to properly qualify the audits. The claims are in the order of $200 million.
A KPMG spokesman told insuranceNEWS.com.au the company is disappointed by the ASIC action and will defend itself vigorously against the claims.
“KPMG has co-operated fully with ASIC during its investigation into the Westpoint collapse since December 2005,” she said.
“While we understand that substantial monies have been lost by investors in Westpoint companies, and that various groups and individuals are naturally keen to recoup their losses, KPMG does not believe that the conduct of its audits of Westpoint entities caused or contributed to the collapse of the Westpoint Group or to losses suffered by investors.”
Brace yourself for severe weather: researchers
A Griffith University study charting more than 200 years of coastal storms indicates a sustained period of severe weather is due in the near future.
The study, Severe storms on the east coast of Australia 1770-2008, suggests that east coast residents can expect more turbulent weather after several “latent decades”.
Researcher Peter Helman told insuranceNEWS.com.au that storm activity has historically arrived in phases, with a new phase now due.
“In the past 30 years, even allowing for Tropical Cyclone Larry in 2006, there has been a relatively low number of storms,” he said. “That has lulled everyone – councillors, developers, all decision-makers – into ignoring the fact that [latent] phase will end.”
Dr Helman also backed insurers’ claims that too many building permits are being approved for construction in highly exposed regions.
“Insurers prepared to cover storm surge are exposed to potentially massive liabilities,” he said.
Mixed outlook for general insurance industry
The economic downturn will put pressure on gross written premium growth and is likely to spur increased claims on certain insurance lines, a leading industry analyst claims.
JP Morgan analyst Siddharth Parameswaran told the Institute of Actuaries of Australia (IAA) annual seminar at Coolum last week that general insurers still face challenges despite being well placed when compared to other financial services providers.
Mr Parameswaran expects gross written premium to slow and says economic conditions may increase claims for directors’ and officers’ liability insurance.
Lower interest rates may have an impact on investment returns while weaker equity markets should also drag down results, he said. Some insurers could also see their reserves dry up.
On the plus side, “insurers have much less credit risk than banks and no liquidity risk due to an incoming stream of premiums to fund payments”. Rising premium rates are also likely to continue.
Mr Parameswaran says that unlike life insurers, general insurers have no capital guaranteed investment product liabilities and unlike wealth managers have no “direct asset value-related revenue streams”.
Profitability of recent years now in the past
A slowing economy, a turnaround in the soft market for commercial lines, increasing pressure from claims inflation and the diminishing influence of reserve releases is marking the change in the cycle for insurance industry.
In a presentation to the IAA seminar last week, Finity consultants Andrew Cohen and Loan-Anh Nguyen say benign weather conditions and the unexpected strength of reserve releases in commercial long-tail and compulsory third party lines have left loss ratios low and delayed any upturn over the past few years.
Projections to 2011 show insurance trading results and returns on equity well below the experience of recent years.
“In light of the current volatility in the investment markets, we have allowed for significant losses for 2008 in the property and equity markets and the fall is the yield curve,” they said.
But they say the industry will still return “reasonable” results, with continued premium growth, rate increases in a number of classes, inflationary pressures and a return to a lower level of storm-related loss.
Brisbane storm ‘worst in years’
A storm that battered south-east Queensland late yesterday is the worst to hit the area in 24 years, according a local loss adjuster.
More than 200,000 homes were left without power as strong winds, heavy rain and hail lashed Toowoomba, the Gold Coast and Brisbane.
While insurers were busy this morning co-ordinating claims service operations, loss adjusters were already on the scene. Advanced Assessing principal Neville Hiscox says he expects a busy week as claims pile up.
“We had a call last night regarding severe damage up at Narangba,” he told insuranceNEWS.com.au. “In Caboolture and suburbs north of there trees are down across roads and across power lines.
Mr Hiscox says the storm – which he says is the worst in the area since 1984 – has damaged many houses. “There are holes in roofs and windows and water has come into electrical fittings. It’s going to take a week for the debris to be cleared up and a couple more to get houses dried out and claims lodged.”
NRMA Insurance says emergency repairs are underway and tarpaulins are being issued to customers with damaged homes.
Queensland State Manager Brett Robinson says with wet weather forecast in coming days “it’s important we make homes safe and as comfortable as possible”.
“Builders have already been allocated to the worst damaged homes and will continue to be allocated as claims for serious damage are lodged,” he said.
NRMA received more than 500 claims for damaged homes and cars by 9am this morning.
Some 200 State Emergency Service volunteers worked through last night attending to 900 incidents across the affected area.
NT Government quells premium hike fears
NT’s Country Liberal Opposition is causing a stir by suggesting motor insurance premiums in the territory will skyrocket due to the financial crisis.
Opposition Treasury spokesman John Elferink says there is a risk that government-owned insurer TIO will have to increase premiums for third party insurance because of the collapse in the stock market.
He says until now the motor accident compensation scheme has been able to suppress costs by putting extra cash in shares but will now struggle to do that.
A spokesman for the NT Government told insuranceNEWS.com.au it will not pre-empt the recommendation or determination of the CTP scheme’s independent commissioner.
“The motor accident compensation scheme premiums are reviewed annually and the next review is not due until early next year,” he said.
Perth risk manager takes RMIA presidency
The Risk Management Institution of Australia (RMIA) has elected Brian Roylett as President.
Mr Roylett is principal of Perth company Roylett Risk Management. He replaces Grant Whitehorn as RMIA President.
Ipswich City Councillor Peter Napier was named Vice President at the RMIA AGM held in Perth yesterday.
Corporate
IAG eyes growth markets
IAG CEO Mike Wilkins says the insurer will use “selective acquisitions” to help propel growth after the company completes the restructure of its Australian operations.
He told last week’s AGM in Sydney that IAG still intends to improve performance in Australia and NZ and pursue international growth options, mostly in Asia.
“I have said that we were interested in undertaking selected bolt-on and other joint venture acquisitions,” Mr Wilkins said. “I think consolidation can occur, and it will.”
The Asian focus follows a forgettable foray into the ultra-competitive UK market, but Mr Wilkins indicated IAG could be among those to consider local targets.
“There could be further consolidation, internationally and in this market, although we’re not seeing any great pressure one way or another for that to occur, but you don’t rule it out,” he told a media conference after the AGM.
The group is currently occupied with establishing its Indian insurance joint venture with the State Bank of India. It has also announced its joint venture in Malaysia has signed a memorandum of understanding to acquire a smaller player in that market.
Mr Wilkins expects better things from the insurer in coming months after the company this year recorded a $261 million loss. The group has forecast an insurance margin above 10%, against 6.1% previously.
Strong lashes out at QBE ‘shotgun’
IAG Chairman James Strong has defended his board’s decision to reject QBE’s acquisition proposal earlier this year.
He told the group’s AGM last week that QBE did not make a formal or complete offer and declined to put a general takeover offer to IAG shareholders, instead insisting on a unanimous recommendation from IAG’s board.
“It was the board’s view that QBE sought to take advantage of the then current negative insurance cycle in Australia to attempt to acquire IAG at a low price,” he said.
He says while the original $9 billion bid “undervalued” the company, IAG still believes there are substantial benefits from combining the two businesses.
“But unfortunately the whole approach by QBE… they kept putting out press releases saying it was a friendly merger. Well, I would hate to have an unfriendly merger with them.
“It was like being asked to go to a picnic and when you get there, there’s a shotgun in the picnic basket.
“We were asked to have an off-the-record discussion with the view to reaching an agreement. When we said we didn’t think it was a reasonable approach, they decided this confidential meeting be released to the stock exchange.”
Mr Strong says QBE is a very successful company but has a reputation for buying things cheaply.
“And they are pretty tough about how they go about it. Their intention was to get shareholders, particularly institutional shareholders, to put pressure on us to sell.”
A QBE spokesman declined to comment on the issue.
Mr Strong also defended his role at the company but said he will not see out the full three-year term after angry shareholders questioned why he had been re-elected when 18% of investors voted against his reappointment.
Wesfarmers still on the takeover trail
Wesfarmers Insurance is still going for growth, with Group CEO Richard Goyder describing the economic environment as “likely to benefit well-capitalised businesses such as ours”.
Speaking at last week’s AGM, Mr Goyder said the conglomerate’s insurance division – made up of Lumley General, Wesfarmers Federation Insurance, Lumley NZ, OAMPS and Crombie Lockwood – has made progress on important initiatives.
The division produced before-tax earnings of $131.6 million last financial year on revenue of $1.64 billion.
“We’ll be actively exploring growth opportunities,” Mr Goyder said.
The positive outlook follows a more sombre assessment in Wesfarmers’ annual report, which noted unexpectedly high weather-related claims and large property and motor losses.
Mr Goyder says Wesfarmers Insurance’s distribution network is continuing to grow “and we’re seeing improved conversion rates from referrals”.
Lumley NZ, which is undergoing a restructuring after the apparent failure of an aggressive sales strategy, is delivering “positive outcomes”, he said.
Insurance division CEO Rob Scott told insuranceNEWS.com.au that further bolt-on acquisitions in the Australian and NZ broking businesses are likely.
“But our focus remains on growth profitability,” he said. “We’re not fixated on topline growth.”
Business is booming at Ebix
International insurance software and online exchange provider Ebix has reported a record third-quarter net profit of $US7.4 million ($11.2 million), 88% higher than last year’s result.
Revenue from Ebix and all subsidiaries climbed 71% to $US20.2 million ($30.6 million) during the quarter compared to $US11.8 million ($17.9 million) last year.
It’s been a stellar first nine months for Ebix with net profit for the period increasing 137% to $US19.4 million ($29.4 million).
Ebix CEO and President Robin Raina says the company has high recurring revenue split across thousands of customers, insulating the company from worldwide market turmoil.
Ebix Australia MD Leon d’Apice told insuranceNEWS.com.au the overall results reflect both a positive quarter and outlook for Australian operations.
The US-based company has attributed a 49% increase in third-quarter operating expenses to the cost of running its new acquisitions like the Telstra eBusiness platform Sunrise Exchange, which it bought last December.
Operating expenses rose to $US12.1 million ($18.3 million).
AMI bucks the downward trend
NZ’s AMI Insurance has bucked the financial trend by posting good results for last financial year – although it doesn’t expect to do so well this year.
The country’s largest wholly NZ-owned general insurer has posted a $NZ26.9 million ($23 million) net profit after tax for the financial year to June 30 – just under last year’s result of $NZ28.4 million ($24.4 million).
This is despite claims costs increasing by 13% to $NZ189.9 million ($163.4 million) due to a number of localised storms, flooding and landslides in Auckland, Wellington and Canterbury, and escalating building repair costs.
CEO John Balmforth says the good results are largely due to growth in written premium, a falling ratio of management expenses to premium, and a very satisfactory return from investments.
“Given the market and economic conditions and a record year of growth in both customer and policy numbers, this was an outstanding result,” he said. “We had growth of 34.2% in our investment returns which is very satisfying.
“While we do not expect the same level of return in the current financial year, our conservative investment policies have paid off. We have minimal exposure to the risky elements in the market.”
The insurer’s sustained high level of performance also recently earned the company a financial rating upgrade by AM Best from A to A+.
Regulatory & Government
Ratings agencies to come under regulatory control
The Federal Government recently imposed licensing and reporting standards on credit ratings agencies. The agencies have been blamed for inaccurate measurements which contributed to the worldwide financial crisis.
Now the ASIC will abolish exemptions that allowed the credit ratings agencies to operate without an Australian financial services licence (AFSL).
Agencies and research houses will be compelled to hold an AFSL and must submit annual compliance reports in line with standards set by the International Organisation of Securities Commissions (IOSCO).
Corporate Law Minister Nick Sherry announced the measures last week after ASIC and the Treasury Department completed a joint report.
Senator Sherry expects the changes to shore up local standards and promote uniform international regulation.
He says there is a global consensus “for improved regulation of credit ratings agencies, whose role has come under scrutiny due to their involvement in providing inaccurate ratings of structured financial products in the lead up to the US subprime loans crisis”.
The ratings agencies appear to be embracing the inevitable, with a spokesman for Standard & Poor’s telling insuranceNEWS.com.au the company welcomes the decision.
“We support any regulatory moves which enhance transparency, and help restore market confidence in credit ratings,” she said. “We believe the ASIC/Treasury findings are largely consistent with the principles of IOSCO, which we support.”
The Government has also announced it will convene an investment roundtable to discuss the role investment firms can play in improving the development, assessment and usage of ratings.
Sydney insurance broker banned
ASIC has permanently banned NSW broker Anastasia Hronopoulos from providing financial services after the regulator uncovered a series of dodgy deals.
An ASIC investigation revealed Ms Hronopoulos “forged insurance documentation, failed to effect insurance for clients and allocated clients’ funds inappropriately”.
Ms Hronopoulos was an insurance broker with Zuellig Insurance Brokers from November 1992 to January 2005 and at OAMPS Insurance Brokers from January to December 2005.
ASIC says OAMPS brought the matter to its attention when it discovered irregularities in Ms Hronopoulos’ accounts and has since worked alongside the regulator to resolve the matter.
ASIC says that between October 2002 and August 2005, Ms Hronopoulos received money from clients intended for insurance policies but the funds were instead used to pay the claims and debts of other clients.
She also allegedly breached financial services laws by creating false instruments that deceived clients into believing they held insurance when no such policies existed.
APRA to improve life insurance industry disclosure
The Australian Prudential Regulation Authority (APRA) is to publish two new insurance industry reports in line with its plans to modernise the collection of life insurance data.
APRA intends to publish quarterly and half-yearly bulletins mirroring existing reports on the general insurance industry.
APRA has invited industry consultation on the new publications, which follow new life insurance reporting requirements introduced by the regulator at the start of the year.
The quarterly life report will include aggregate financial performance, solvency and capital adequacy of insurers, while the half-year bulletin will sum up their annual performance. Reports will commence after the first quarter of next year.
APRA says the publications will “provide policyholders and the public with a more comprehensive analysis of the strength and performance of the life insurance industry”.
Another adviser expelled over Westpoint
Yet another financial adviser has been banned over his involvement with Westpoint.
ASIC has banned Perth adviser Clinton Gary Reid from providing financial services for six years.
Mr Reid was found to have made misleading and deceptive representations to clients as to the risk of investing in Westpoint. ASIC alleges he also failed to investigate the products he recommended to clients and provided inappropriate advice in relation to Westpoint.
At the time he was working with Brighton Hall Securities, which is now in liquidation.
Mr Reid is the 20th licensed adviser who advised on Westpoint products to be banned.
Australia asked to keep pace with regulation
Ernst & Young’s (E&Y) Global Insurance Centre has recommended the insurance industry and regulators use the current global financial crisis to drive a “constructive evolution of regulatory guidance”.
It has called for increased risk management and is spruiking the governance and supervisory principles of Solvency II as “the right response at this time”.
E&Y Solvency II Taskforce Leader Philipp Keller says the Australian industry is generally in fairly good shape.
“You are quite well positioned compared to other jurisdictions, ” he told insuranceNEWS.com.au. “It is a sophisticated industry with a sound regulatory framework.
In a report E&Y says the insurance industry faces fewer urgent liquidity challenges compared with banks, but warns: “However, the valuation of assets has been severely affected by the crisis and capital reserves in many insurance companies have been severely depleted.”
Solvency II assesses the capital needs of insurance companies by evaluating all risk using an economic assessment. It is likely to be introduced as part of the capital regulatory regime for European Union insurers from 2012.
E&Y says regulators and insurers should now engage in short-term liquidity testing and cashflow analysis and also evaluate company-specific threat scenarios.
Financial Services
FPA names adviser award finalists
It’s been a tough year in which to shine, but nine financial planners have made the grade to be named finalists in the Value of Advice Awards.
Organised by the Financial Planning Association (FPA), the awards recognise the professionalism and value of advice FPA members provide to their clients.
FPA CEO Jo-Anne Bloch says despite volatile economic conditions, entries this year were “an exceptional demonstration of the value and quality of sound financial advice”.
The finalists are:
Post-retirement planning and management: Angela Jenkins and Kate Kimmorley (GWM Adviser Services); Dacian Moses (Waterfall Way Associates).
Pre-retirement planning: Wai-Ping Arthur (Securitor Financial Group); Leanne Bull (Axa Financial Planning); Cameron Paul (Momentum Planning).
Wealth accumulation and protection: Ray Albrighton (Announcer Financial Planning); Gregory Cook (Financial Wisdom); Sharon Walker (NAB Financial Planning).
The winners will be announced during the FPA national conference on November 20.
… and fights financial crisis with new website
The FPA is helping financial planners fight the economic crisis with a new online resource centre for its members.
The Market Volatility Member Resource Centre will contain tools and communications strategies to help members reach out to clients.
The centre enables members to give clients guidance to navigate troubled markets and includes articles and sample letters to assist with client communication and soft skills education programs for financial planners.
There are also links to support and counselling services to help planners, research and statistics with economic data and links to Government policies, statements and websites.
FPA CEO Jo-Anne Bloch says the initiative was developed to combat member concerns about “the inevitable impact on superannuation, savings, jobs, spending, and general confidence.”
The FPA is also reaching out to consumers with a new advertising campaign based on real-life case studies about the importance of having a financial planner. New website and print advertisements have also been released, with the slogan “You pay to see a financial planner. You could pay more if you don’t.”
ING opens risk unit
ING Australia has opened a new business unit with an emphasis on investment and retirement solutions to protect baby boomers from the ups and downs of investment risk.
Spokesman Peter Hansen told insuranceNEWS.com.au the retirement and investment solutions business unit will offer annuity-style products that are aimed at baby boomers.
Mr Hansen says as the baby boomer peak is passing, the majority will be moving into the retirement phase and will be drawing down their superannuation.
ING is tapping into the need for retirement income stream products that offer protection against market volatility, longevity and inflation risk.
“The big issue in the current economic climate is market volatility, and our products will have a built-in protection factor to mitigate against these risks,” he said.
The new unit’s first product will be on the market in the middle of next year.
International
AIG bailout package upped to $US150 billion
The US Government has restructured its bailout of AIG, increasing its financial rescue package to $US150 billion ($228 billion).
The extra injection is intended to stabilise the insurer following the announcement of a record third-quarter loss, driven by investment writedowns.
Under the new plan the US Treasury will buy $US40 billion ($60.81 billion) in AIG preferred shares as part of a comprehensive plan to restructure federal aid to the “systematically important company”.
The Emergency Economic Stabilisation Act will allow AIG to pay a reduced interest rate on its borrowings. The loan will also be extended from two to five years, easing the pressure on the insurance giant to sell its business lines and other assets to repay the Government.
But despite the capital injection, the US Treasury says AIG must comply with the same “stringent limitations” on executive bonuses and golden parachutes as other financial institutions that receive government financial assistance.
And it has warned AIG to “continue to maintain and enforce newly adopted restrictions put in place by the new management on corporate expenses”.
… as it records a record loss
AIG reported a $US24.47 billion ($38.27 billion) net loss for the third quarter, compared to a profit of $US3.09 billion ($4.8 billion) for the third quarter of last year.
It recorded $US15.06 billion ($23.5 billion) of capital losses arising from impairment charges on its investment portfolio.
Also contributing were losses related to credit default swaps of $US4.59 billion ($7.2 billion) and partnership and mutual fund investment losses of $US1.1 billion ($1.7 billion).
In general insurance lines AIG reported an operating loss of $US899 million ($1.41 billion) compared to a profit of $US2.51 billion ($3.9 billion) in the third quarter of last year.
This was driven by significant catastrophe losses of $US1.39 billion ($2.2 billion) primarily related to Hurricanes Gustav and Ike, compared to $US24 million ($37.5 million) in corresponding period last year.
The combined ratio blew out over 23 percentage points to 113.61%.
New Chairman and CEO Edward Liddy says the company’s reported earnings “are not indicative of the underlying core earnings power of our insurance businesses, which remain solidly capitalised”.
Zurich profit plummets
Zurich Financial Services has reported a 90% drop in profit for the third quarter due to the financial crisis and an expensive US hurricane season.
Net profit for the quarter fell to $US154 million ($234 million) from nearly $US1.55 billion ($2.35 billion) in the corresponding period last year.
Claims from Hurricanes Gustav and Ike took out another $US595 million ($903 million) during the period.
In the general insurance division, business operating profit for the first nine months declined 7% to $US2.6 billion ($3.95 billion), largely driven by increased losses from large and mid-sized claims, and the impact of lower premium rates.
Zurich’s combined ratio overall also increased by 1.9 percentage points to 98.7% for the first nine months, with Hurricanes Gustav and Ike accounting for 2.4 points.
Zurich’s results were more positive in the policies written for the first nine months. Gross written premium rose 7% to $US29.2 billion ($44.5 billion).
The company attributes this growth to “successfully exploiting organic growth opportunities within attractive market segments” and “through the integration of recent acquisitions”.
CEO James Schiro says Zurich will see “an improving general insurance environment and continued opportunities across all our businesses” in the future.
Bank drags Allianz down
Allianz may have finally sold Dresdner Bank, but losses from the bank have forced the German insurer to abandon forecast earnings for its life insurance and asset management businesses.
Dresdner Bank last week posted a net loss of €2.4 billion ($4.7 billion) in the first nine months to September, compared to a profit of €858 million ($1.69 billion) in the prior period.
Allianz reported a €2 billion ($3.9 billion) loss for the third quarter, driven by a €1.2 billion ($2.3 billion) loss from its banking operations, and writedowns linked to the bank’s value. Allianz agreed in August to sell Dresdner Bank to Germany’s Commerzbank in a €9.8 billion ($19.21 billion) deal.
Now the Munich-based insurer says it can’t make an accurate prediction on projected earnings for the rest of the year and next year. “Without a major market recovery, the operating profit outlook of €9 billion ($17.63 billion) before banking for the year and next year cannot be reached,” board member Helmet Purlet said.
The group’s general insurance operations saw third-quarter operating profit decrease by €3 million ($5.8 million) to €1.5 billion ($2.93 billion). Operating profit in the life insurance business declined by €655 million ($1.28 billion) to €218 million ($425 million).
Hurricanes batter Liberty Mutual earnings
A $US697 million ($1.08 billion) liability from Hurricanes Ike and Gustav has blown a hole in third-quarter earnings at Liberty Mutual Group, with the insurer haemorrhaging 98.5% of net income.
The US firm earned a dismal $US6 million ($9.3 million) in the quarter against $US404 million ($629 million) last year.
Investment losses of $US162 million ($252 million) compounded the catastrophe losses.
Chairman, President and CEO Edmund Kelly says the “fundamental strength of the business has never been more apparent”.
UK seeks future vision for insurance
The British Government has set up a new industry group to focus on the long-term needs of the insurance and investment industry.
The insurance working group will represent the life, general, reinsurance, wholesale, consultancy and distribution sectors. It will cover all aspects of the insurance value chain, including the challenges and opportunities that the UK insurance industry will face over the next 10 to 15 years.
While the economy is currently facing challenging times, co-chair and Aviva CEO Andrew Moss says the group will increase its learning and opportunities in the financial services sector to “shape the future landscape of the UK insurance industry”.
Verdict out on insurance comparison websites
A Financial Services Authority (FSA) review of British insurance comparison websites has found most sites are improving but some still have a way to go.
The FSA discovered significant improvements and consistently clear and fair advertisements on many but says some firms showed a lack of clarity in the terms used.
It says they need to obtain better information from insurers about the levels of excess that apply to insurance policies and clarify assumptions about consumers’ needs and circumstances used to obtain quotes.
Director of Retail Policy and Conduct Risk Dan Waters says the FSA is asking some firms to take prompt action to address these concerns.
“It is imperative that comparison websites provide clear information so that consumers can make informed decisions,” he said.
ING achieves an unwanted ‘first’
Dutch group ING reported its first quarterly loss last week, as it wrote down the value of investments impacted by the market crisis.
ING posted a third-quarter net loss of €478 million, ($918 million) compared with a profit of €1.1 billion ($2.11 billion) a year earlier.
ING’s writedowns included €628 million ($1.2 billion) on stocks and €416 million ($799 million) on assets tied to the bankruptcies of Lehman Brothers and Washington Mutual.
Insurance profit from Europe plunged 72% to €101 million, ($194 million) while Asia and Pacific insurance results fell 87%. The loss in the Americas was €214 million ($412 million).
ING CEO Michel Tilmant says its underlying banking and insurance businesses’ were “generally sound” but warned “weakening economic conditions will put pressure on results into 2009”.
ING last month became the first to get a cash injection of €10 billion ($19.3 billion) from the Dutch government to increase its financial strength.
It will use half of the funds to boost shareholders’ equity at the banking unit and €2 billion ($3.8 billion) to boost the insurance business.
Canadians pounce on AIG and its directors
A Canadian law firm is mounting a class action against AIG, claiming it has caused “massive losses to Canadian investors”.
The new move in the AIG saga comes as the troubled US giant prepares to sell off its Taiwanese life insurance operation to raise capital.
Canadian law firm Siskinds wants $C550 million ($694.8 million) from AIG and various current and former directors following the “crippling decline” in the group’s share price.
Lawyer Dimitri Lascaris says Ontario’s investor protection laws allow Canadian investors to “pursue remedies in our own courts against American corporations that fail to respect Canada’s securities laws”.
AIG is also reportedly planning to unload its Taiwan life insurance unit Nan Shan Life. The group had previously wanted to sell a 49% stake, but has reportedly now decided to sell its entire stake for $US2-$2.5 billion ($3.1-3.9 billion).
Buffett set to buy Dexia’s bond insurance unit
The insurance businesses of billionaire investors Warren Buffett and Wilbur Ross are close to buying all or part of Financial Security Assurance, the US bond insurance unit of Dexia bank.
Belgian media sources reported last week that the transaction between insurers Berkshire Hathaway Assurance and Assured Guaranty and French-Belgian financial services group Dexia is in its final stages.
Reacting to the “rumours” that it would consider selling all or part of Financial Security Assurance, Dexia said in a statement last week it is “exploring the options and means” to reduce the “specific risk” associated with the unit.
Dexia also reported that any decisions “will be the subject of a specific communication in due time”.
The troubled European bank received a €6.4 billion ($12.4 billion) bailout from the French, Belgian and Luxembourg governments in September.
Analysis
The ugly offspring of the NSW mini-budget
Mini-budgets are all too often conceived in haste with much fumbling in dark corners. They are usually born ill-formed and unwanted by anyone. Even their parents quickly learn to hate their own offspring.
So it will be with the mini-budget announced last week by NSW Treasurer Eric Roozendahl, who imposed a $3.6 billion impost on the state’s citizens in a bid to stave off ratings agency downgrades.
Voters are notoriously fickle, and Premier Nathan Rees is gambling that in a few years they will have forgotten the way this government – elected only in March and guaranteed a four-year term – roughed them up.
Ignoring the new financial impositions on families and motorists – the daily news journalists have had a field day with them already – we should concentrate instead on a small issue that was buried well down in the small print of Mr Roozendahl’s document.
It imposes another $39 million levy on insurance policyholders, this time for the funding of the State Emergency Service – just weeks after the state’s own price watchdog described such levies as the most inefficient in the state’s vast tax basket.
Not surprisingly, the insurance industry is furious. Its peak bodies have fought against taxes on premiums for many years, and until last week had seemed to be making progress.
ICA was the first to find the additional tax buried down the back of Mr Roozendahl’s statement, describing it as “yet another unnecessary, inefficient and ill-conceived tax to be paid by general insurance policyholders”.
The council offered only one example of the new SES tax – the impact on the average householders policy. CEO Kerrie Kelly said the cost of running the SES “will be picked up by general insurance consumers at an additional estimated cost of $10 per policyholder”.
With motorists fuming over new bridge tolls, 500 more red light cameras and congestion taxes, the mainstream media wasn’t going to get excited about an extra $10 revenue-raiser being lumped on the annual cost of insurance.
And of course, it was far worse than that, as NIBA CEO Noel Pettersen quickly pointed out. Brokers’ clients are going to be forking out a lot more than $10 on every commercial premium as they raise $40 million for the SES on top of the $383 million they already pay for the fire services. And by the time you add GST and stamp duty on top – each level being rounded up to maximise the final damage – the added cost of insurance will be even more significant for every NSW policyholder.
As Ms Kelly and Mr Pettersen said, it’s less than a month since the IPART review of NSW state taxation delivered a report calling for the elimination of the fire services levy system which is the model for the new SES levy, and for a sharp reduction in stamp duty on insurance premiums as well.
ICA even met Emergency Services Minister Tony Kelly on October 2 to discuss the IPART report, which his government had commissioned. Maybe he wasn’t listening; maybe he didn’t read the report; or maybe he’s just another NSW state politician.
Last week he hailed the mini-budget “reforms” and pointed out that the work of SES volunteers “is every bit as important as that done by our fire services, so it is appropriate for the SES to be funded in the same manner”.
Not a word about the IPART report’s contradictory findings, strangely. But wait, there’s more.
“Insurance companies are required by legislation to contribute towards the annual costs of running the fire services, in recognition of the significant savings in claims on the industry each year from properties being saved by our fire fighters from destruction by fire,” he said.
As ICA’s Ms Kelly (no relation) pointed out, the IPART report described the fire services levy as “a highly inefficient tax that creates disincentives for appropriate insurance”.
“Instead of taking advice from the IPART Review, which the current NSW Government established, the NSW Treasurer has chosen to introduce another highly inefficient tax to plug the NSW budget black hole,” she said.
NIBA’s Noel Pettersen was less diplomatic, describing the new arrangement as “a disgrace”.
“NSW’s emergency services deserve to be well funded, but that funding arrangement must be equitable and based on sound taxation principles,” he said. “In this case it is neither. This just shifts the burden from the Government’s shoulders on to those citizens who are prudent enough to insure their assets.”
The SES levy is, of course, nothing more than an opportunistic and cynical move by a panic-stricken government, but its implications are very serious.
Over the past 15 years the industry has spent a great deal of money and invested considerable time in lobbying for change to the insurance tax system. It has presented convincing evidence that insurance taxes are a direct cause of underinsurance and non-insurance and worked hard to change attitudes to insurance taxes.
The Victorian Government, whose enthusiasm for the revenue-raising potential of insurance taxes is never-ending and whose doublespeak on the subject surpasses even Mr Kelly’s, will be watching all this with interest.
As government revenues decline in the face of the global economic meltdown, how long will it be before Victoria’s Treasurer decides efficient taxes are far less important than raising a few more million from insurance premiums?
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