Low interest rates are taking their toll on some European insurers as
they prepare to implement more stringent capital regulations being
introduced by the European Union.
Results from three of the continent’s largest insurance companies Wednesday showed how low or negative yields are having an uneven effect, forcing some companies to change their strategies.
Tidjane Thiam, the outgoing chief executive of Prudential PLC, who is leaving to run Credit Suisse Group AG, warned about the “headwinds” of low long-term rates and said that his priority since 2008 has been to reduce the company’s reliance on rates for its earnings.
“It was my deeply held belief that if we wanted to control our destiny we needed to reduce the [interest rate] income in our earnings,” the chief executive said. “We’ve done that successfully.”
Prudential on Wednesday said total new business profits fell 6% from a year earlier in the first quarter, to £496 million. Total annual premium equivalent, a common measure of sales for U.K. insurers—reached £1.25 billion, up 7% compared with the first quarter of last year.
Prudential’s shares fell 1% on Wednesday in London.
Insurers are particularly sensitive to low rates. One of the main ways they make money is by collecting payments made by policyholders and investing them in the market for higher returns, mostly in bonds because they are seen as lower risk than equities. When interest rates fall, insurers’ margins get squeezed.
Low market yields also force insurers to put aside more cash because they can’t rely on high market returns to generate enough cash to fulfill their obligations to policyholders.
“There is a lot of jiggery-pokery they can do to manage these numbers to at least show a good number,” said James Shuck, an analyst at UBS AG.
Read more: Low Interest Rates Pressuring European Insurers - WSJ
Results from three of the continent’s largest insurance companies Wednesday showed how low or negative yields are having an uneven effect, forcing some companies to change their strategies.
Tidjane Thiam, the outgoing chief executive of Prudential PLC, who is leaving to run Credit Suisse Group AG, warned about the “headwinds” of low long-term rates and said that his priority since 2008 has been to reduce the company’s reliance on rates for its earnings.
“It was my deeply held belief that if we wanted to control our destiny we needed to reduce the [interest rate] income in our earnings,” the chief executive said. “We’ve done that successfully.”
Prudential on Wednesday said total new business profits fell 6% from a year earlier in the first quarter, to £496 million. Total annual premium equivalent, a common measure of sales for U.K. insurers—reached £1.25 billion, up 7% compared with the first quarter of last year.
Prudential’s shares fell 1% on Wednesday in London.
Insurers are particularly sensitive to low rates. One of the main ways they make money is by collecting payments made by policyholders and investing them in the market for higher returns, mostly in bonds because they are seen as lower risk than equities. When interest rates fall, insurers’ margins get squeezed.
Low market yields also force insurers to put aside more cash because they can’t rely on high market returns to generate enough cash to fulfill their obligations to policyholders.
“There is a lot of jiggery-pokery they can do to manage these numbers to at least show a good number,” said James Shuck, an analyst at UBS AG.
Read more: Low Interest Rates Pressuring European Insurers - WSJ
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