Axa highlights life insurers' problems

Life insurer Axa cut its profit outlook, underscoring the difficulties faced by companies in this part of the market who are committed to minimum payouts to customers.

The move was in sharp contrast to reinsurer Munich Re , the world's biggest seller of protection to home and business insurers, which raised its outlook on Wednesday.

Axa, Europe's No. 2 insurer by market value, blamed tough financial markets, with returns on German and U.S. government bonds as well as European equities falling short of its initial expectations.

Central banks have slashed lending rates since the onset of the 2008 crisis in an effort to kick-start the flagging global economy, eating into the returns insurers receive from sovereign and corporate debt, their preferred investment assets.

That has squeezed European life insurers' profits particularly hard because their best-selling products are savings policies that promise minimum returns to customers, often for periods of up to 25 years.
"The issue for life companies is that with (almost) zero percent interest rates, in the medium term they're dead," said Investec analyst Kevin Ryan.

Non-life insurers and their reinsurers, by contrast, do not have fixed financial obligations to customers, with payouts determined solely by the frequency and size of claims.

Their revenues have also held up better in the economic downturn because customers see many of their products - such as motor or home insurance - as indispensable even in hard times, unlike life insurance and savings policies.

Non-life insurers have also benefited because some investors see them as a safe haven during financial crises, analysts say.

Britain's FTSE non-life insurance index <.FTASX8530>, seen as a proxy for the wider sector, is up 26 percent since the start of 2008, the peak year of the global banking crisis, while the FTSE life index <.FTASX8570> is unchanged.

In an effort to preserve profits, life insurers have been trying to sell different types of savings, such as unit-linked policies, where no guarantee is offered and returns to the customer depend purely on market performance.

Some have also been refocusing on protection products, such as traditional life insurance, where the insurer pays a lump sum if the customer dies unexpectedly.

"It is tougher for life companies, which is why you are seeing a shift from savings products towards trying to write more protection business," said Ben Cohen, an analyst at stockbroker Canaccord Genuity in London.

Germany's Munich Re on Wednesday said it was on course for a net profit of about 3 billion euros ($3.8 billion) this year, surpassing the 2.8 billion pencilled in by analysts.

Axa said earnings per share growth between 2010 and 2015 could amount to just 5 percent, at the bottom of a 5 to 10 percent target range the French company set itself last year.

Munich Re and domestic rival Hannover Re are looking to raise their dividend for 2012 and both expect to maintain net profit at a high level in 2013 after posting a strong rise on the back of low damage claims this year.