Last month's victory of the center-right VVD Party over the anti-EU Party for Freedom in the Dutch elections eased some concerns over the operating environment for local insurers, but a troubled road still lies ahead, according to analysts.
Expectations of a fiscal spending boom after the election of Donald Trump as U.S. president raised hopes on the other side of the Atlantic for an increase in key interest rates that boost investment income, yet there is little sign that Dutch insurers will benefit as European monetary policy stays loose. This, according to Theodoor Gilissen Bankiers analyst Joost van Beek, is the "key factor" for the fortunes of Dutch insurers in 2017.
Limited opportunities for organic growth, slim returns and legislative changes are all putting pressure on the country's main players, with Achmea BV's, Delta Lloyd NV's and AEGON NV's full-year 2016 results all failing to meet S&P Global Ratings' expectations, according to a March 15 report. For 2016, Delta Lloyd, Achmea and NN Group NV reported combined ratios of more than 100%, which indicates an underwriting loss.
Rabobank analysts wrote in a March 22 research note that after a "mixed bag" of 2016 results, the "challenges continue" for Dutch insurers, with cost cutting sure to be a 2017 priority.
"[T]he continuation of the low interest rate environment and the heavy competition in the insurance market is expected to remain challenging for the coming periods and we expect the focus to remain on cost cutting and synergies," they wrote.
Some companies are therefore turning to economies of scale. NN Group's takeover of Delta Lloyd should generate synergies of €129 million, according to RBC Capital Markets analyst Gordon Aitken. Delta Lloyd, for its part, is predicting synergies of €200 million.
The logic behind M&A has some justification, according to S&P Global Ratings analysts, as only those insurers that can "demonstrate the benefits of diversification and superior returns" will thrive in the medium and long term.
Dutch insurers have also struggled with a switch in customers' preferences from life insurance to bank savings — a trend that reflects, according to S&P Global Ratings, the impact of tax changes, improved offerings from banks and a public loss of confidence in unit-linked insurance products after misselling scandals. Further declines in premium income are expected for 2017. Only ASR Nederland NV, a mid-sized player in which the Dutch state owns a large stake, showed a high rate of growth among Dutch insurers in both 2015 and 2016, S&P Global Ratings noted.
In this context, the merged NN Group and Delta Lloyd entity is unlikely to pursue an expansionary strategy, van Beek told S&P Global Market Intelligence. He expects the company to focus on synergies and protecting its margins, adding that it could even tolerate a reduction in its market share.
The odd one out
One Dutch insurer stands out, as its exposures make it markedly different from its peers. AEGON is primarily focused on the U.S. market and is expected to benefit from a pickup in rates there, though its recent performance has raised doubts over the quality of its management.
A sharp fall in the solvency ratio reported by its Dutch business as a result of asset de-risking and new interest rate hedges led to it missing analysts' expectations for its Solvency II ratio, which came in at 159% at year-end 2016, 2 percentage points below consensus, Barclays analysts noted when the company's full-year results were released in February.
"AEGON has a habit of surprising in a negative way," van Beek told S&P Global Market Intelligence. "There is low trust towards the AEGON management because of a lot of nasty surprises over the past two or three years, and this is adding to that as well."
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.