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Credit crunch cripples European insurers' profits

PARIS/AMSTERDAM - The global credit crisis tore a hole in the profits of some of Europe's top insurers on Thursday, with AXA and Aegon both posting sharply lower earnings.

The news came after Allianz and American International Group Inc revealed continued weakness in their businesses, weighed down by risky investments and continued financial market turmoil.

But insurance stocks as a whole were resilient, with the DJ Stoxx European banking index up 0.3 percent by 0900 GMT, caught between relief over AXA saying it did not need a capital increase and disappointment over Aegon and Allianz's results and outlook.

But credit spreads widened a bit, ahead of interest rate decisions by the Bank of England and European Central Bank, with the investment-grade Markit iTraxx Europe index at 95 basis points, according to data from Markit, 1 basis point wider from Wednesday.

AXA, Europe's second-biggest insurer, said net profit fell 32 percent to 2.162 billion euros ($3.35 billion), partly because of writedowns on fixed income assets due to the financial market turbulence. AXA, whose shares rose 6 percent to 21.6 euros in Paris, also proposed a stable 2008 dividend of 1.20 euros per share.

Aegon said impairments on U.S. credit and subprime mortgage investments had hurt its second-quarter earnings, and its shares fell while reinsurer Hannover Re also published lower profits. Aegon was down 4.5 percent at 7.89 euros, the biggest decliner in the index.

Bucking the trend was Britain's second-biggest commercial insurer, RSA Insurance Group Plc, which eked out a first-half profit rise and saw its shares rise 2 percent in London.

The credit crunch, sparked by losses on U.S. subprime mortgages, has hit insurers around the world. Falling stock markets have affected insurers since many of them hold their assets in equities.

British insurer Friends Provident also posted lower earnings, with a 20 percent drop in first-half profit at the low end of expectations as it overhauls its strategy and seeks buyers for its non-core assets. Shares fell 2.7 percent, the second-biggest index decline.

"The main impact on the industry is still on the asset side," Aegon Chief Executive Alex Wynaendts told reporters in Amsterdam. "The situation is still uncertain."

Allianz, Europe's biggest insurer, posted lower second-quarter net profits and abandoned its 2009 profit goal. Its shares fell 0.9 percent to 111.95 euros in Frankfurt.

"It's a rather difficult sector at the moment," said Bank Vontobel insurance analyst Uwe Otten.

"From a pricing side, the cycle is expected to go down."

Difficult environment

In the United States, AIG posted its third consecutive quarterly net loss of more than $5 billion on Wednesday as it wrote down bad mortgage-related investments, sending its shares down almost 8 percent.

Analysts at Barclays said the key risk in the sector was a "combination of equity and property market falls combined with a large claim event".

"Current insurer valuations appear to factor in a substantial risk of downgrade and capital raising requirements," the Barclays analysts said in a note.

Allianz said late on Wednesday that new guidance was impossible given the financial market turmoil that kept its Dresdner Bank unit firmly in the red in the second quarter.

"We expect this difficult market environment to continue to 2009, therefore our 2006 long-term operating profit growth target of 10 percent compound annual growth rate until 2009 cannot be maintained," Allianz said in a statement.

AXA said it expected flat 2008 underlying earnings would be "in line" with those of 2007, provided market conditions did not deteriorate materially.

"AXA's business strategy is built to withstand severe economic conditions and we remain well positioned to benefit from any upturn in the market environment," Chief Executive Henri de Castries said.

The DJ Stoxx European insurance sector has fallen around 21 percent so far this year, broadly in line with a similar decline in the FTSE Eurofirst 300 index.

Aegon said it booked impairments of 98 million euros, as well as 226 million euros on investment losses. The impairments, however, were not as high as several analysts had expected, in a range of 150 million to 160 million euros.

Aegon's Wynaendts said insurance premium and annuity sales, particularly high-end products, remained strong and provided a solid base, adding: "We are going to weather the storm."