Commercial insurance article archive

UK insurers first quarter 2007 results show the health of the market

With the first quarter results in for many of the UK's insurers, the state of play for the next year seems to be continued growth as the sector moves out of a worldwide period of decline.

The lean years of low income in the early years of the decade have been cast aside by most insurance groups, with only a few posting disappointing international results.

AIG, the world's biggest insurer, posted first quarter worldwide income results of £2.08 billion which is up from £1.6 billion for the same period last year.

This strong international growth was mimicked by Allianz (formerly Allianz Cornhill), Europe's largest insurer, who posted net profits of £2.2 billion, up from £1.2 billion due to large asset sales, however revenue slightly declined by one per cent to £19.9 billion.

Such strong growth from larger insurers continues the insurance market trend that has reined since 2005, when the corner was turned in countering declining incomes.

However, competition for market share in the UK remains high and is set to increase as HSBC recently announced it will be boosting its presence in the general insurance sector through a soon-to-be-completed deal with the country's largest insurer Aviva.

Although that makes conditions more difficult, that challenge remains in the future and analysts have been focusing on the certainties of past performance.

The first quarter of 2007 saw net incomes soar for big players like Allianz (by 82.1 per cent) as well as groups with a smaller market presence like Zurich, which still enjoyed substantial growth of 71 per cent in net income across the group to £700 million.

This came on the back, however, of falling revenues for Zurich in the UK and Ireland – a trend that has continued from earlier results – but the volume of UK insurance customers serviced by the group managed to remain stable, acting as a buffer against a series of recent declines.

Remarking on the results of his firm, Zurich's chief executive officer James J Schiro said that the increase in profits was down to the company's "rigorous approach to operational excellence" which included streamlining the corporate structure, improving tax efficiency and changes to the management of capital.

Structural changes were also on the agenda for Prudential, who, living up to their name, moved to reduce their presence in less profitable market areas, as well as cutting costs in order to turn around its UK business.

For the last two years, Prudential's sales growth in the UK has been behind that of other insurers, with analysts blaming stiff competition coupled with a weak distribution network which hampered efforts to boost sales.

But following the changes in strategy in this first sector of the year, Prudential chief executive Mark Tucker said that the results had so far been encouraging.

"Many initiatives are in place that are already providing benefits," he told reporters in a conference call in April. We're competing on terms that are economically sustainable."

However, Prudential's sharp decline in UK sales by 23 per cent on the year to £183 million still does not make for a wholly positive reading, even if last year's one-off £66 million bulk annuity deal with Royal London contributed to this drop.

At least the HSBC deal with Aviva has quietened rumours that Prudential could be a target of a take-over bid from Europe's biggest bank, which may allow it to focus on improving its UK performance, while its planned deal to sell health insurance through Boots may provide an overdue boost in UK customer numbers.

But with overseas performance still strong, Prudential may be able to continue to offset its UK operation for a while longer and continue its efforts to create boost sales.

In fact, by biting the bullet early, Prudential may be ahead of the game as some industry figures believe that streamlining efforts and modernisation of methods is set to be necessary across the whole of the UK insurance market.

Lloyd's chief executive Richard Ward told the London Insurance Day Summit in May: "It is time that we in the London market accept that the drive for efficiency is not something that is being done to us – it is something that has to be done by us."

According to Mr Ward, comparisons with other financial sectors show up the failings of the insurance industry in terms of customer service and efficiency.

However, he added that previous improvements, such as the success in meeting contract certainty targets, should be the inspiration for more changes in the London market if it is to encourage more business.

Not all insurers are finding the market so tough, however, with Aviva still striding ahead as the UK market leader. Total UK sales at the insurer were up nine per cent to £3.5 billion, which follows last year's first quarter growth of 34 per cent.

This has been built on the successful sales figures in life insurance, which have grown by nearly 50 per cent in the last two years, with new business up 12 per cent to £86 million.

With such progressive figures to boast, Aviva seems to be weathering the recovering UK market better than most, but group finance director Andrew Moss stressed that the company was like other insurers working towards greater efficiency.

"Since the cost-saving announcements in December and September last year, our UK life business has delivered estimated annual cost savings of £68 million and we remain on track to deliver against our overall programme," he said.

These savings were in addition to the strong contributions from bonds and investments, which saw sales growth of 28 per cent and 48 per cent respectively.

With stand-out figures like these, Aviva looks in good stead for the rest of the year - especially with that intriguing HSBC deal on the cards.

31 May 2007