Solvent Survivors

Solvency II sounds like the title of an unimaginative Hollywood movie sequel. But this insurance industry EU directive, due in 2012, promises some interesting plot twists — including a big rise in M&A activity, surprising in today's turmoil.

Wait and See

Both Wemmer at ZFS and Maso y Guell Rivet at AXA UK say their companies will continue bolstering business with careful bolt-ons, and Lehman’s Lilley says the European industry “would benefit from consolidation.” Meanwhile, Sal Oppenheim predicts that diversification will “really pay off” for insurers once Solvency II takes hold. But the uncertainty pummelling the financial markets at present means many companies will still be wary of making major moves.

At Aegon, the situation in the financial markets makes life frustratingly uncertain, even though the company isn’t entertaining big buys. Does CFO Streppel see investors’ perception of insurers changing? “The problem is pretty complicated because the markets only gradually understood that if you only invested in AAA and AA securitisations in the subprime and you have no CDOs at all, the chances are pretty low that you have to take impairments,” Streppel says.

“Until that understanding broke through, we were treated exactly the same as the investment banks that kept leveraged positions in BBB subprime structures, so they were hammered down and then the general market thought, ‘The insurers do all that stuff as well,’ and there we went as well.” (For the record, when Aegon announced its fourth-quarter results, it said there was no impairment to its €2.9 billion subprime portfolio.)

All Streppel can do is wait to see when and how the market shifts back and values insurers more fairly — besides, he says, insurance CFOs have plenty of other things to keep them busy. “In the meantime, as CFO you look to your general risk management, defence levels, pricing for assets and products, liquidity, you handle capital as efficiently as possible,” he says. “It is a difficult time [but] what you do in practice is set out your strategy, check it once again and be prepared to execute that strategy when the market is better.”

Tim Burke is senior staff writer at CFO Europe.

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