Martin Flanagan: Even insurers are now losing their ‘boring but secure’ tag

INSURERS must feel like the stalwart, stay‑on‑the‑porch brother of their car‑crashing banker siblings who still unfortunately have to stump up jointly for the garage bills. Banks take bigger marketplace risks with partial casino banking business models than insurance companies would ever dream of in their embedded value dreams.

But when banking sovereign debt exposures send stock market assets plunging, their poor brothers in life assurance get caught up in the whirlwind.

Aviva and ING were the latest insurers to report weaker quarterly sales yesterday, following on from what was deemed lacklustre sales growth at Standard Life earlier this week.

Hide Ad
Hide Ad

The reason is not hard to find. How many consumers are going to go diving into long‑term savings products based on stock market performance in the current turbulent financial sector and amid weakening economic growth?

They are more concerned with hand-to-mouth issues, such as keeping their jobs and putting bread on the table than planning mellow retirements.

Aviva, Standard and their peers may talk all they like about new business models, with bespoke, high margin products rather than wholesale low margin blitzes for market share.

But the latest round of results show these new business re‑engineerings cannot be ringfenced from the old world. In these markets pension trustees are also sitting on their hands as the asset hurricane blows, which is not good news for the life industry.

Insurers’ capital buffers are also stronger than their wayward brothers, but the equities (and increasingly bonds) they are invested in are under pressure, not least due to banking jitters.

Staid stocks are not as safe as we always thought

A STOCK market adage is that food retailers weather a downturn better than most businesses because of the non‑discretionary nature of food spending. But it is often taken as an investor given that consumer products giants suck as Reckitt Benckiser, Unilever, Procter & Gamble etc also have similar upholstery against chill economic winds.

This line of thinking is that consumers cannot really do without the likes of toilet cleaner, washing powder and rubbish sacks, not to mention lip balm.

British‑Dutch giant Unilever’s drab third‑quarter results yesterday question this wisdom, most notably when a downturn is exacerbated by surging commodity prices.

Hide Ad
Hide Ad

Most consumer durable products come wrapped in plastic and other packaging that is at the mercy of those commodity price rises.

Unilever revealed that its raw material costs had jumped 15 per cent this year, particularly driven by hikes in the cost of crude oil and vegetable oil. It says it has only been able to pass on well under half of this in increased prices to consumers.

The default response of Unilever and its consumer product peers seems to be to take a hit on margins in order to protect revenues and market share, while awaiting an eventual upturn.

They are also resigned to reining in broader marketing spend to plough intensive investment behind maybe the top few hundred brands in the marketplace.

It all underlines that virtually no sector is immune from current economic pressures.

Bean paints a gloomy picture of economic woe

DEPUTY Bank of England governor Charlie Bean stresses in his latest speech that the UK and eurozone are experiencing slowing growth, China and some other emerging economies are decelerating but at a slower rate, and recent growth in the United States could prove ephemeral.

Varying degrees of concern wherever one looks, then. Bean also highlights the debilitating embrace sovereign states and their banking industries are in.

The stretched public finances of several euro‑area governments, and not just at the eurozone periphery, raise questions about their ability to support their banking systems.

Hide Ad
Hide Ad

But the weak position of those banking systems, says Bean, is heightening doubts about the sovereigns’ fiscal sustainability without bail-outs. Both sovereigns and banks are therefore trying to save each other while in need of saving themselves.

It again shows that the last thing needed is a disorderly Greek default and ejection from the euro, with the potential tidal wave of ramifications for the rest of Europe.

Related topics: