European Insurance Industry: Low Interest Rates Pressuring European Insurers - by Juliet Samuel

Low interest rates are taking their toll on some European insurers as they prepare to implement more stringent capital regulations being introduced by the European Union.

Results from three of the continent’s largest insurance companies Wednesday showed how low or negative yields are having an uneven effect, forcing some companies to change their strategies.

Tidjane Thiam, the outgoing chief executive of Prudential PLC, who is leaving to run Credit Suisse Group AG, warned about the “headwinds” of low long-term rates and said that his priority since 2008 has been to reduce the company’s reliance on rates for its earnings.

“It was my deeply held belief that if we wanted to control our destiny we needed to reduce the [interest rate] income in our earnings,” the chief executive said. “We’ve done that successfully.”

Prudential on Wednesday said total new business profits fell 6% from a year earlier in the first quarter, to £496 million. Total annual premium equivalent, a common measure of sales for U.K. insurers—reached £1.25 billion, up 7% compared with the first quarter of last year.

Prudential’s shares fell 1% on Wednesday in London.

Insurers are particularly sensitive to low rates. One of the main ways they make money is by collecting payments made by policyholders and investing them in the market for higher returns, mostly in bonds because they are seen as lower risk than equities. When interest rates fall, insurers’ margins get squeezed.

Low market yields also force insurers to put aside more cash because they can’t rely on high market returns to generate enough cash to fulfill their obligations to policyholders.

“There is a lot of jiggery-pokery they can do to manage these numbers to at least show a good number,” said James Shuck, an analyst at UBS AG.

Read more: Low Interest Rates Pressuring European Insurers - WSJ

European Commission hits back at Prudential Insurance over threat to leave - by David Sandham

The European Commission said it had issued the statement in response to news stories that said the Prudential insurance company was considering leaving London because of the future Solvency II rules.

'The Commission fundamentally disagrees with statements made by some insurance companies that Solvency II leaves them with no choice but to leave the EU,' the statement said.

The Prudential's chief executive Tidjane Thiam had attacked the Solvency II rules earlier this week, saying: "We love London, we're a British company and we've been here for 160 years. It's not a debate about London but about the things that are happening in Brussels. Without Solvency II we wouldn't be having this debate.'

The European Commission vigorously defended its position. 'Solvency II – which the industry campaigned for in the first place – will improve the international competitiveness of insurers, not undermine it,' it claimed. 'The financial crisis demonstrated only too clearly how important good risk management and sound governance are. This is true for all financial actors, and not just banks. And this is not time for complacency in the financial sector.'

Note EU-Digest: maybe Prudential should get out of the EU and give up a market of close to half a billion people. This is the EU and Prudential will have to follow the rules of the land. It's as simple as that.

For more: European Commission hits back at the Pru over threat to leave - New Model Adviser®