- Increaced financial income
- Buffer capital improved, but still low
- Non-life insurance companies show profits for the first time since autumn 2000
The development in the securities markets in the first half of 2003 has positively affected the life insurance companies' results. The buffer capital has been somewhat strengthened, but is still too low to give the companies the room for manoeuvre they need to ensure satisfactory returns in a period with low interest rates. Higher financial income has lead to a significant improvement in results for the non-life insurance companies as well. Thanks to improvements in the insurance operations the last two to three years, the companies can again show positive results.
Life insurance
The results of the life insurance companies depend to a large extent of the development in the securities market. Both Norwegian and foreign stock exchanges have experienced growth in the first half of 2003. Long interest rates fell in the first half year, but have been increasing since. Price gains as a consequence of increasing share prices and reduction in long interest rates have lead to an improvement in the companies' results compared with last year. Results before taxes and profit allocation to policyholders was closer to NOK 6 billion compared with a loss of 7.3 billion in the same period last year. The better result is mainly due to increased net financial income. In aggregate, the equalization reserve increased by NOK 4.2 billion in the first half, so that the adjusted result was NOK 10.1 billion or 4.8 per cent of ATA (annualized). In the same period last year, the life insurance companies had an adjusted result of minus NOK 8.5 billion, or minus 4.2 per cent of ATA (annualized).
The buffer capital of the life insurance companies was NOK 18.5 billion or 4.3 per cent of total assets at the end of the second quarter. At the end of 2002 the companies had an aggregate buffer capital of NOK 14.3 billion (3.4 per cent of total assets). For some time the Life insurance companies have been adjusting their risk exposures to the low buffer capital. Equities accounted for 8.9 per cent of total assets at the end of the second quarter. While the exposure to equities has decreased since 2000, the holding of interest bearing instruments has increased. Bonds held to maturity accounted for 36.3 per cent of total assets at the end of the second quarter, while other bonds and certificates accounted for 31.8 per cent of total assets.
The companies are facing challenges with respect to the low buffer capital, low equity holding and low interest rates. The life insurance companies' reduced holding of shares compared to interest bearing instruments have made the companies more vulnerable to developments in the interest rate markets. A low interest rate level will in the longer run lead to lower returns. In order to ensure a satisfactory return in the future, it is important that the companies manage to build up the buffer capital and the risk-bearing capacity, so that they can increase their investments in equities and other assets which can provide higher returns in the long run.
Non-life insurance
The non-life insurance companies (45 companies) had an aggregate result of NOK 1.5 billion. In the same period last year, the result was minus NOK 1.7 billion. Technical accounts showed a surplus of NOK 176 million, NOK 396 million less than the first half of 2002. The weakening of the technical accounts is due to the companies having booked as expenses a significant increase in fluctuation provisions. In aggregate the combined ratio of the companies (sum of claims costs and insurance related administrative costs in percentage of premium income) showed a clear improvement year on year. Among the 45 sampled companies, 10 had negative results of ordinary operations.
The three largest non-life insurance groups had a result of ordinary operations before taxes of NOK 595 million, compared with a deficit of NOK 968 million in the same period last year. Technical result in the three groups was minus NOK 8 million, so the profit was due to an increase in net financial income. Equities made up 6 per cent of total assets, an increase of 1.7 percentage points year on year. Short term bonds and certificates accounted for 49.8 per cent, and increase of 17.1 percentage points year on year. The holding of bonds held to maturity was reduced by 5.1 percentage points, and accounted for 5.8 per cent of total assets. The three groups satisfy the minimum requirements for solvency margin and technical provisions.
Structural Issues in 2003
On 18 March, DnB Holding ASA and Gjensidige NOR ASA proposed to merge the two financial groups. On 11 April, the boards of DnB and Gjensidige NOR agreed to merge. The new group would be named DnB NOR and would become the largest financial group in Norway. The prospectus was published on 2 May and the extraordinary shareholders' meeting was held 19 May. The merger was approved by the shareholders. The merger must be authorised by the Ministry of Finance, based on a recommendation from Kredittilsynet. (In addition, the Competition Authority must not object to the merger). The merger is planned to take effect within the end of the year.
On 19 August 2003 the Competition Authority notified DnB Holding ASA and Gjensidige NOR ASA that the Authority considers to prohibit the planned merger of the two companies. In its preliminary assessment, the Competition Authority stated that a merged DnB NOR will have market power in several markets, and that competition will be significantly restricted.
On 29 August Kredittilsynet recommended the Ministry of Finance to authorise the merger between (the holding companies) DnB Holding and Gjensidige NOR and the merger between the banks Den norske Bank and Gjensidige NOR Sparebank. Kredittilsynet suggests that authorisation be granted on certain conditions. Kredittilsynet finds that neither solvency concerns, nor competition concerns, nor provisions in the financial legislation present obstacles to a merger.
The Competition Authority must present its final decision by 19 November. The Competition Authority’s review and decisions as to the DnB and Gjensidige NOR merger is independent of the license approval processes conducted by Kredittilsynet and the Norwegian Ministry of Finance.
A merger between DnB and Gjensidige NOR will create the largest financial conglomerate in the Norwegian financial market. A merger of the two largest financial institutions will lead to increased concentration and fewer institutions in the market. DnB NOR will achieve a particularly high market share within banking and life insurance.
With regard to the life insurance market, DnB NOR will achieve a high market share within individual annuity insurance. Kredittilsynet has reached the conclusion that it would be most practical to let the companies themselves assess how they can gradually lower their market share in individual annuity insurance to a maximum of 45 per cent. The parties to the merger should be required to present a plan for the market share reduction.
Contact persons:
Director General Bjørn Skogstad Aamo, tel. (+47) 22 93 99 29
Adviser Liv Karin Methi, tel. (+47) 22 93 98 65
Adviser Jan Hagen, tel. (+47) 22 93 98 62
Attachment:
Preliminary half-year figures 2003 for insurance companies (doc)
