Insurance is a multi-faceted sector which spans a wide spectrum of financial products ranging from risk products, such as house insurance and life insurance, to savings and pensions products.
In Ireland there are a large number of companies producing insurance products although there are now only three quoted companies - Irish Life, Hibernian and FBD. New Ireland has only recently been taken over by Bank of Ireland. So far in 1998 these stocks have performed exceptionally strongly with Irish Life doing particularly well.
Part of the reason for the recent strength in the Irish Insurance sector has been the likelihood of consolidation across the industry Europe-wide. Unlike the Irish equity market, insurance companies are well represented in many European equity markets. Few of these companies would be household names in Ireland, but the table shows that quoted companies on European exchanges include some very substantial companies.
The table lists the seven largest quoted companies by market capitalisation and what is immediately striking is the sheer scale of these companies compared with the largest Irish company - Irish Life - which is capitalised at about $2 billion.
However, there are several quoted insurance companies of a similar scale to Irish Life such as London & Manchester and United Assurance in Britain, and Colonia in Germany.
The medium-term environment for insurance companies looks very attractive throughout the Continent. One of the biggest issues facing many European countries is the much talked about "Pensions Time Bomb". With the exception of Britain, Ireland and the Netherlands, most European countries have not funded their future pension liabilities.
Future generations of taxpayers are likely to be unable or unwilling to bear the full burden of these future liabilities. This issue is only beginning to be addressed through the encouragement of greater contributions into private pension schemes. Furthermore, this increased flow of savings is likely to be increasingly directed towards equity based investments which offer higher long-term returns.
All financial services companies, including banks and life insurance companies, will be clear beneficiaries of this trend. However, the current low interest rate environment will favour the more equity-focused product range offered by insurance companies. Clearly banks will be well positioned to take advantage of this trend towards greater investment in stock market-based investments through their asset management and insurance subsidiaries.
Indeed alliances and merger and acquisition activity within and between the banking and insurance sectors is likely to remain an ongoing feature of the financial services landscape throughout Europe for many years.
From an investment viewpoint, the insurance sector in Europe is likely to continue to provide attractive medium-term returns. Most Irish investors will have exposure to insurance stocks through holdings in Irish Life, Norwich Union and to a lesser extent in Hibernian Insurance. Although all of these shares have risen strongly in recent months they are well worth holding over the medium-term. However, with the advent of monetary union investment in a number of European companies should be considered.
Of the very large companies Swiss Re of Switzerland and Generali of Italy are attractive. Swiss Re has a geographically diversified mix of business and is currently enjoying earnings growth of the order of 20 per cent. After a number of recent acquisitions Generali is set to become one of the top three players in the European market place. Closer to home London & Manchester in Britain is a smaller company which could prove to be a rewarding investment.
While the overall environment is favourable there clearly is a risk that competition amongst the various financial services companies will squeeze margins to such an extent that profits only grow slowly or decline. Profit margins are being forced lower and this trend is likely to continue.
However, improvements in productivity through investment in information technology and ongoing cost-cutting and rationalisation has meant that most insurance companies have been able to grow profits in the face of stiffening competition.
As long as productivity continues to improve the insurance sector across Europe should continue to hold its own.
