European Insurer Groups Weather Storm, Oil Claims But Outlook Cloudy

August 5, 2010

Major European insurance groups weathered a slew of damage claims for storms and the collapse of the Deepwater Horizon oil rig to post stronger-than-expected half-year earnings on Wednesday.

But prospects for the rest of 2010 remain cloudy, with low interest rates and sluggish economic growth undermining investment income and sales, while the Atlantic hurricane season typically intensifies in the coming weeks.

AXA, Europe’s second-biggest insurer by market value, benefited from improved life insurance margins and stronger financial markets while Munich Re, the world’s biggest reinsurer, stuck to its full-year earnings goal despite the claims hit.

“We aim to earn a profit of over 2 billion euros in 2010; that remains ambitious but it is achievable,” Munich Re Chief Executive Nikolaus von Bomhard said.

Insurers have been hit by a sharp rise in claims due to an earthquake in Chile and winter storms in Europe at the start of the year.

In addition they face a potential $3.5 billion loss from the sinking of the Deepwater Horizon in the Gulf of Mexico as well as $1 billion worth of damage from severe storms in the United States in the second quarter.

Munich Re has estimated industry damage claims from natural catastrophes alone totalled $22 billion for the first half, more than double the first-half averages for the past 10 years.

The tough half was offset by a rebound in global financial markets, boosting investment income.

“Although earnings reflect the mediocre environment, they confirm our positive view on AXA’s rebound capacity when the climate turns more favourable,” said Kepler analyst Pierre Flabbee in a research note, keeping a ‘buy’ rating on the share.

Cash-rich Legal & General reported a jump in first-half profit and said it had generated well over half its targeted cash for the year, allowing it to hike its dividend 20 percent and predict further international expansion.

Axa shares initially rose over 3 percent in early trading while Munich Re shares were up 1.5 percent, outperforming their European sector.

Both later eased, with Axa closing down 0.6 percent and Munich Re up 0.9 percent. L&G fell 1.27 percent and the sector index was flat.

BEATS FORECAST

Axa’s first-half underlying profit declined 2 percent to 2.08 billion euros ($2.72 billion), topping the average forecast in a Reuters poll of nine analysts of 1.88 billion euros.

Net income fell 29 percent to 944 million euros but this included a well-flagged one-time loss of 1.48 billion from the sale of some UK Life Assets to insurer Resolution.

Munich Re reported quarterly net profit up 3.5 percent to 709 million euros, above even the highest forecast of 570 million euros in a Reuters poll and confounding the average expectation for a 30 percent decline.

Munich’s earnings were helped by gains from sales of equities, government and corporate bonds, and derivatives, with the company saying it did not expect its strong return on investment to be sustainable in the second half.

“Overall, these results confirm Munich Re’s status as a conservative and well-run group and the current share price valuation is certainly not demanding,” said Helvea analyst Tim Dawson, who has a ‘neutral’ recommendation on the stock.

Munich Re’s shares, which were seen as a defensive investment during the financial crisis, are now flat compared with the start of the year, lagging a 2 percent rise in the Stoxx 600 European insurance index.

Data from StarMine, which weights analysts’ forecasts according to their track record, show Munich Re trading at 9.1 times 12-month forward earnings, a premium to rivals Swiss Re and Hannover Re, which trade at multiples of 8.7 and 7.5, respectively.

AXA stock has lost 11 percent so far this year, underperforming a 3.2 percent gain in the European insurance sector. It trades at 8.6 times 12-month forward estimated earnings against 8.1 times for Allianz and 6.9 times for ING, according to StarMine estimates.

(Writing by Jonathan Gould and Marcel Michelson; Editing by Karen Foster and David Cowell)

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