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EU-based insurance trio likely to stick to remaining UK ops

Despite the turmoil and uncertainty that have followedBritain's vote to leave the EU, AXA, AgeasSA/NV and AEGONNV are seen as likely to maintain their U.K. presence.

All three EU-based insurers derive sizable chunks of theirrevenues and income from the U.K. market, but France's AXA and Belgium's Ageashave functionally quit the more volatile life market to focus on nonlife, whileDutch firm AEGON has reduced its life business to a more"capital-light" model.

AEGON's rate riskless potent in UK

Marcell Houben, an analyst with NIBC Markets, said in an interviewthat life-focused insurers such as AEGON are likely to be particularly affectedby the fallout from Brexit, as products offering guaranteed rates of return toclients, once a popular proposition in Northern Europe especially, come underfurther pressure from prolonged low interest rates. Life insurers rely heavilyon investments in safe-haven bonds, yields on which have been pushed well intonegative territory.

"Brexit will have a huge impact on insurance,particularly life insurers like AEGON that have some guaranteed products,"Houben said. "The uncertainty along with the market's expectation of [acontinued] or more intensive quantitative easing program will put pressure oninterest rates, especially in the Netherlands and Germany."

But a pair of sales earlier in 2016 reduced the amount of capitalAEGON needs to devote to underpinning its U.K. business and boosted itsSolvency II ratio, which many analysts considered to be on the low side. Houben said AEGON'sremaining U.K. business is "relatively capital-light" and likely tobe largely unaffected by a fall in interest rates.

The U.K. business accounted for €125 million of AEGON's€1.94 billion underlying pretax profit in 2015, although the division accountedfor €5.65 billion of a total €17.4 billion in life gross premiums, along with€2.33 billion of the life business' €8.58 billion of investment income. It alsogenerated €911 million of new life sales on an annual premium equivalent basis,nearly half the €1.94 billion total.

The underlying profit contribution does demonstrate the riskto EU insurers' bottom lines of the weakening of the pound against the euro.Worth more than €1.30 on the eve of the referendum, £1 is now trading at under€1.17. The underlying profit of AEGON's U.K. business fell slightly in sterlingterms year over year in 2015, to £91 million from £92 million, but rose in euroterms to €125 million from €115 million thanks to currency movements.

Nonlife firms less atrisk

Ageas, meanwhile, quit the U.K. life business at the end of2014, and AXA followed suit earlier in 2016 in a of announced sales. Both will now concentrate on the relatively lessBrexit-exposed nonlife business.

Ageas' U.K. division accounted for €2.46 billion out of atotal €6.3 billion in nonlife gross inflows in 2015, and €1.75 billion out of€4.04 billion in net earned premiums. The net result in the U.K. nonlifedivision was just €34.3 million, against €187.2 million for the business as awhole, as flooding late in the year led to elevated claims.

AXA's U.K. and Ireland division, meanwhile, generated €4.88billion of the company's €31.52 billion in nonlife revenues, and €273 millionof the €2.23 billion in 2015 underlying earnings.

Bart Jooris, an analyst with Degroof Petercam, told S&PGlobal Market Intelligence that he perceives Ageas management as committed toits U.K. business.

"Of course, if the country goes into recession anddoing profitable business there becomes difficult, they might [leave thecountry], but the life business in the U.K. will be much more hit by Brexitthan the nonlife business," he said.

At AXA, meanwhile, outgoing CEO Henri de Castries hasreacted with dismay to the Leave vote, telling the Anglo-American PressAssociation in Paris that the British had "jumped off a cliff" byvoting Leave, according to a July 7 Forbesarticle.

But Pierre Chedeville, an analyst with CM-CIC Securities,told S&P Global Market Intelligence that with AXA having exited U.K. life,its remaining business in the country is unlikely to see much more movement.A further worsening of the economic climate could see a cost-saving of €2.1 billion by theend of 2020 expanded, Chedeville added, but the company's principal focus isunlikely to materially shift.

"Strategically, there won't be a change," he said."We will see if in the weeks and months that come whether a recessionmight cause AXA's profits to fall in the U.K."