Banks

BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Economy

Draghi: Eurozone will decline without vital productivity growth

It’s productivity, stupid. European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation. Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the […]

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Currencies

Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Banks

Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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Archive | Insurance

Hunt for yield pushes more investors into riskier assets

Posted on 29 November 2016 by

Pension funds and insurance companies have increasingly embraced riskier assets in their hunt for higher returns over the past five years.

Alternative assets such as property, infrastructure, private equity and hedge funds have been bought up by institutional investors in a world where yields on safer government bonds have hit rock bottom.

Total assets managed by the 100 largest alternative investment managers rose to $3.6tn this year, up 3 per cent on 2015, according to consultants Willis Tower Watson, as these assets have become more embedded in the portfolios of pension funds and insurance groups.

This switch into alternative products has prompted warnings that some of these institutional investors could be severely affected in the event of a financial shock or the seizing up of liquidity in the markets.

The OECD, the Paris-based group of mostly rich nations, warned last year that pension funds and insurance companies faced a growing threat of insolvency because of their increased allocations to riskier assets.

“The main concern is whether pension funds and life insurance companies have, or might, become involved in an excessive ‘search for yield’ in an attempt to match the level of returns promised earlier to beneficiaries or policyholders when financial markets were delivering higher returns. This might heighten insolvency risks,” the OECD said in its business and finance outlook for 2015.

So what are institutional investors doing to make sure they are not taking on too much risk?

Chris Hitchen, chief executive of the UK railway pension fund RPMI Railpen, says: “It is much harder to get returns today because yields are low. It takes decent returns as well as decent contributions to make decent pensions. This involves some risk.

“We have risk systems in place to try to ensure we do not get into a position where we are forced sellers. In the event of falling markets, we want to be in a position where we have enough liquid assets to pay our pensions and firepower to invest at lower prices.”

RPMI has investments in quoted shares, real estate, infrastructure, private equity and hedge funds, all considered riskier than government bonds, traditionally the safest assets.

The group has a system in place that monitors risk to its portfolios daily, while it employs experienced fund managers to ensure that its funds’ positions deliver the best returns with risks reduced to the lowest possible levels.

Other institutions such as Legal & General Investment Management carefully monitor systemic risk, or the perceived dangers to the markets of a breakdown in the financial system that would prevent investors from being able to sell assets or liquidate positions.

LGIM says that risks to the system are elevated because of rising worries over a hard landing in China, the threat of a break-up in the EU as the economies continue to struggle to grow, the potential fallout of Brexit and concerns over the impact of expected US interest rate moves.

John Roe, head of multi-asset funds at LGIM, says: “There are elevated risks in the system. As a fund manager or institutional investor, that means you have to be more vigilant and think more carefully about the weightings in your portfolio.”

Other fund managers say investors need to be more disciplined and flexible, seeking opportunities in areas of the market such as corporate high-yield bonds, subordinated bank debt, infrastructure and equities.

“Equities look good value and so does infrastructure. But you need a longer term horizon to invest in these type of securities,” says the investment director of a top UK fund manager.

“A pension fund that is still open to new members and is looking to hold an asset for a long time can be quite comfortable with equity volatility or the illiquidity in a market like infrastructure because they can hold these assets for years.

“Some pension funds refer to their quarter as 25 years, rather than three months. If you have that kind of long-term horizon, you can take quite a lot of risk and not face any threat in terms of insolvency.”

However, the reality is that it is much harder today to make decent returns.

“Going forward, if you want 8 per cent today in returns, you are going to struggle,” says Mitch Reznick, co-head of credit at Hermes Investment Management. “It is harder to hit those kind of returns with zero interest rates.”

He adds that the days when a pension fund or insurance company could rely on government bonds, typically considered close to risk-free, for returns, is in the past.

Unless a pension fund puts all its money in cash or treasury bills, which offer zero rates or in some cases negative yields, then there will always be a danger that the market could undermine its portfolio and cause losses.

As Jim Leaviss, head of retail fixed income at M&G Investments, says: “There is no such thing as a free yield. If you want yield, you have to take some risks.”

Insurers likely face extra $15bn bill for new asbestos claims

Posted on 29 November 2016 by

More than 25 years after asbestos-
related claims contributed to the near collapse of the Lloyd’s of London market, insurers face an additional $15bn of losses related to the cancer-causing substance.

A new study by insurance credit rating agency AM Best finds that claims linked to asbestos on historic policies “show no sign of abating”. The latest increase brings the total forecast bill for companies including Berkshire Hathaway, Swiss Re and Munich Re to about $100bn.

The industry has paid out about $64bn for asbestos exposure, making it easily among the most costly causes of insurance losses in history, and set aside $21bn in reserve for future claims.

But costlier treatment, rising life expectancy and creeping litigation bills are still pushing up expenses more than expected — prompting AM Best, which raised its estimate in 2012, to do so again.

A new generation of claimants is also emerging, said Brian O’Larte, an analyst with AM Best. The offspring of workers who had in their childhoods been exposed to asbestos through their parents are ageing.

Once extolled for its strength, versatility and heat resistance, asbestos was widely used in construction before the mid-1970s. If inhaled, however, its particles can cause diseases including mesothelioma, a cancer, and asbestosis, a scarring of lung tissues.

Today the toxic properties of asbestos are well known. But the conditions it triggers can take decades to manifest and new victims are still emerging. Insurers are paying out about $2.5bn a year on historic policies, sometimes on legacy books of companies they acquired.

In absolute terms, the additional forecast expenses are comparable to the most costly recent US catastrophes. Hurricane Sandy caused less than $20bn in insured property damage when it devastated chunks of the east coast four years ago.

The asbestos payouts are to be made over several years, however, and should be easily absorbed by the well-capitalised and diversified global insurance industry, analysts said.

AM Best says asbestos and environmental claims have added an average of only 0.6 basis points over the past five years to the industry’s “combined ratio” of claims paid and expenses incurred as a proportion of premium income.

Insurance sector sees bright side of Trump win

Posted on 28 November 2016 by

Donald Trump may be just what the global insurance industry needs. Shares in several of the sector’s largest companies have outperformed the market strongly since the US election, on hopes that a prolonged squeeze on their returns is finally drawing to a close.

Years of ultra-low rates have eaten away at fixed income returns, hurting insurers as their business models require them to deploy policyholders’ premiums conservatively, usually through holding corporate and government bonds.

Now, they potentially have a lot to gain as financial markets reflect expectations of a US shift towards fiscal stimulus that is seen bolstering growth and sustaining a trend of higher interest rates.

“It takes away the feeling of your back being against the wall,” says Tod Nasser, chief investment officer at Pacific Life.

A jump in bond yields since the election earlier this month — along with the prospect of lighter financial regulation — have driven shares in the two biggest US-listed insurers by assets, MetLife and Prudential Financial, up about 18 per cent.

That has outpaced gains for several big US banks, and compares with a rise of less than 4 per cent in the benchmark S&P 500 index since Donald Trump became president-elect.

European insurers have also rallied — the UK’s Prudential by 19 per cent and France’s Axa by 14 per cent.

“The equity markets have gotten it exactly right,” says Michael Siegel, global head of insurance at Goldman Sachs Asset Management. “This industry is going to benefit from a gradual rise in interest rates.”

Insurers play a major role in world markets, with $24tn worth of investments — representing about 12 per cent of global financial assets, according to the International Monetary Fund.

A sustained trend of higher yields would finally enable the industry to reinvest funds from maturing bonds at more appetising levels. The multiyear bond bull market has been increasingly tough as insurers have had little choice but to buy at lower rates, effectively locking in weaker returns for years. About 15 per cent of US life insurers’ assets mature each year, estimates David Lomas, head of BlackRock’s global financial institutions group.

The benefits of higher yields would be felt by life insurers in particular. Their liabilities stretch out for decades, requiring them to invest for the long-term. The average duration of bonds they hold is about seven or eight years compared with three or four for their property and casualty counterparts.

Improved bond returns would make it easier for the life insurers to meet promises they have made in the past, and also make the pensions, savings and annuity products they offer more attractive to new consumers. “Life insurers naturally do better with higher rates,” says Nikhil Srinivasan, chief investment officer of Generali, the Italy-based insurer.

They would also make the industry more likely to resist the temptation of turning to higher-risk asset classes. Mark Snyder, managing director, global insurance solutions at JPMorgan Asset Management, says that while some types of higher-yielding investments “get a lot of press”, life insurers have so far avoided making substantial changes to their asset allocations. “If yields rise, they won’t have to,” he adds.

Despite the promise of reflationary economic policies, many in the industry are cautious. For a start, there are doubts about the incoming Trump administration and the president-elect’s pledge to unleash a $1tn economic stimulus package.

“You don’t really know which way Trump’s going to go,” says James Shuck, insurance analyst at UBS. “You need more certainty for the next leg up.”

Moreover, the companies’ investment portfolios will continue to feel the pinch from depressed yields for years to come. Strategists estimate that if bond prices remained unchanged, life insurers’ investment income would continue to fall for about another five years. “Better reinvestment rates will come through in a very phased fashion,” says Mr Shuck.

Equity valuations continue to reflect the lower-for-longer headache. MetLife and Prudential Financial trade at only about 80 per cent of the companies’ respective book values — a sign of investor pessimism.

The benchmark 10-year US government bond yield is now just shy of 2.4 per cent, up sharply from lows of 1.4 per cent touched in the summer. Yet it remains only just above the 2.3 per cent level at which it started the year.

Yields “are still dramatically below where they’ve been historically”, says Mr Siegel of Goldman. “If this is all the movement we get, it’s not a solution.”

Currently, falling bond prices reduces the value of existing assets held by insurers. For every 1 percentage point rise in interest rates, estimates Kurt Karl, Swiss Re’s chief economist, the value of the US property casualty industry’s fixed income assets falls by about $50bn.

However this is not as big problem as it might sound as unlike other investors, insurers tend to hold bonds until they mature, allowing them to withstand interim fluctuations in their value. “If you’re a hold-to-maturity investor, you don’t really suffer that mark-to-market swing,” Mr Lomas says.

Additional reporting by Robin Wigglesworth

Lloyd’s boss urges UK to share cyber attack data

Posted on 28 November 2016 by

Inga Beale, chief executive of the Lloyd’s insurance market, has called on the UK government to share data about cyber attacks as the industry is struggling to collect enough information about new digital threats.

Cyber insurance is one of the fastest growing parts of the industry as high-profile attacks — such as the one suffered by Tesco Bank earlier this month — drive up demand from companies for cover.

The market generates premiums worth about $2.5bn per year and is expected to grow to $7.5bn by 2020.

New EU regulations due to come into force in 2018 will make it compulsory for companies to report details of cyber attacks to the authorities, much as companies in the US do already. Ms Beale hopes that the industry can use anonymised versions of those reports to help with pricing.

Ms Beale said the lack of available data about past attacks was a problem for insurers who want to provide cyber coverage.

“We’d love to have the data to build up a fair pricing model,” said Ms Beale. “We’d very much like to be able to work with the government in 2018 and beyond to get a flavour of the types of breaches and the cost of them.”

Insurance experts expect the new rules to drive demand for cyber insurance as companies seek to cover the reporting costs and remedial work associated with an attack. Companies that suffer data breaches could face fines of up to €20m under the new rules.

Ms Beale says that Lloyd’s, which has a 25 per cent share of the global cyber market, has introduced 15 new products in the past year, and now offers coverage for the costs of reporting attacks, regulatory costs, liability for third party costs and business interruption coverage.

Buyers of cyber insurance have in the past complained that the policies on offer are too limited as they do not cover the damage that an attack can cause to a company’s reputation or brand.

Ms Beale says that policies at Lloyd’s now cover the lost sales that can result from reputational damage. “This is an opportunity [for the insurance industry] to build trust and prove that it can play the role we say it should.”

New data from AIG shows that ransomware and extortion cause the largest number of claims on cyber insurance policies in Europe, rather than higher profile data breach incidents. The US-based insurer says that ransomware accounted for 16 per cent of claims between 2013 and 2016.

Noona Barlow, head of liabilities and financial lines claims for AIG in Europe, said: “While ransom demands typically remain small, this form of extortion is a lucrative and relatively straightforward way of accessing ‘fast cash’ for cyber criminals and we can only see it growing in the future.”

UK’s Circle Holdings targets ageing Chinese population

Posted on 27 November 2016 by

Circle Holdings has teamed up with Chinese investors to develop and manage a medical clinic in Shanghai, joining a wave of foreign operators seeking to capitalise on the nation’s ageing population.

The Aim-quoted company has formed a joint venture to design, build and operate 10 medical clinics throughout China in the next five years. The first will open on the site of a refurbished hotel in Shanghai in 2017, offering a range of GP, diagnostic, outpatient and treatment services to wealthy individuals who will be offered membership or pay-as-you-go treatment.

Circle’s move underscores the growing appetite by western healthcare companies to expand in China after Beijing removed a cap on foreign ownership of private hospitals in 2012. Just 7 per cent of Chinese healthcare is provided by the private sector but companies have been encouraged to expand after Beijing’s decision to extend medical insurance to private hospitals.

Steve Melton, chief executive of Circle, said it hoped to press forward with the other openings “quite quickly” once the infrastructure has been established. He added that the deal proved that the UK’s “horizons remain global in the wake of Britain’s decision to leave the European Union”.

A government initiative to shift treatment away from hospitals — where many Chinese are treated for minor ailments — to care by family doctors and local clinics should also boost the market along with the increasing urbanisation of its 1.4bn population, Mr Melton said.

Other investors include China Taiping, the third-largest insurer by revenue in China, which has 5.5m private medical clients, the state-owned Xinxing Cathay International Development Group, a conglomerate which provides all the uniforms for the Chinese army, and Huzhou Yongxing Investment Company. The investor group has committed Rmb200m (£22m) to the projects.

7%

of Chinese healthcare is provided by the private sector

Circle is best known in the UK for its takeover of Hinchingbrooke Hospital in Cambridgeshire, the first NHS hospital to be managed by a private company. The trailblazing deal came to an abrupt end last year when Circle pulled out of the hospital just three years into a decade-long contract amid financial troubles and mounting criticism of its performance.

Circle will provide the management and development services under the Circle Harmony brand, which it has formed in partnership with Deep Sea Capital, a Hong Kong-based investment house.

Once the facility is operational Circle Harmony will receive an annual management fee of £150,000 per clinic for a minimum of 20 years and annual profit-share of up to 10 per cent. It will also receive 10 per cent of the value should the new company decide to pursue a stock market listing.

The Shanghai clinic will also give patients access to specialist and secondary care services at the state-run Ruijin Hospital. In return, Circle will provide Ruijin Hospital with access to training and research opportunities in the UK in a deal that has been supported by the British government.

University College London Hospital has agreed to provide specialist medical advice while the Moeller Centre, a leadership development centre in Cambridge, which has several Chinese clients, will develop a training programme.

Ireland’s central bank boosts staff for Brexit insurers

Posted on 27 November 2016 by

Ireland’s insurance regulator has increased its staff numbers by more than a quarter ahead of an expected influx of applications from London-based insurers looking to move operations following the Brexit vote.

London-based insurers are looking at options if the UK loses so-called “passporting” rights after Brexit that allow them to operate elsewhere in Europe, including relocation of some of their operations. Last week AIG became the latest insurer to warn it was considering moving its European base away from London.

The Central Bank of Ireland (CBI), which regulates the industry, is already fielding enquiries, according to Sylvia Cronin, the bank’s director of insurance supervision. Dublin is seen as an attractive alternative to London given its proximity, language and skilled workforce.

“I’m staffing up for the first half of 2017 because of the increased number of enquiries in Q3,” said Ms Cronin. “My sense was that companies wouldn’t come and talk to regulators until there was some more substance [over Brexit], but the opposite seems to be occurring. Due to the uncertainty, companies are proactively approaching us.”

Ms Cronin adds that, although it is still early in the process, she has increased her staff numbers to deal with Brexit and the EU’s new Solvency II capital rules.

“It’s being able to respond to the demand and being sure that we deliver on our service standards. Since the beginning of the year, we have grown our team by over 25 per cent and will grow further.”

Dublin already hosts a large number of insurance and reinsurance companies, which makes it easier for new entrants to recruit specialist staff.

Dublin is also on the shortlist for banks and asset managers looking for an alternative point of entry to the EU after Brexit. While the insurance team is staffing up, the CBI has publicly complained about skills shortages in its banking supervision department, in part owing to pay restraints that were imposed in the financial crisis and departures of staff to the European Central Bank’s new single supervisory mechanism.

Those shortages have triggered fears that it will take years for the CBI to deal with the expected influx of banks. Some banks have also reported a cold welcome from the CBI, which was badly burnt in the Irish financial crisis.

An insider at the CBI disputed suggestions that Ireland did not want or could not cope with an influx of new banks. He said the country was very much “open to engagement” and would “make sure that we dedicated sufficient resources to deal with whatever we are presented with in a timely manner”. The ECB will ultimately have the final say on licence applications for any large bank.

Of the insurers, so far only Beazley, which already has an operation in Dublin, has said that it plans to increase its activities in the city. Aviva, meanwhile, is thinking of turning its Irish branch into a full subsidiary.

Dublin is not the only name in the frame though. Insurers are also looking at Germany, France, Luxembourg and Malta as possible new homes.

Annuity providers told to offer customers rival deals

Posted on 25 November 2016 by

Annuity providers will have to tell customers if they can get a better deal elsewhere under new rules being developed by the Financial Conduct Authority.

The FCA is concerned that too many people still buy an annuity from the same company that has looked after their pension savings, rather than shopping around for a better quote and taking what the industry calls the “open market option”.

The regulator said that 60 per cent of annuity buyers do not switch provider. Of those, four-fifths could have got a better deal elsewhere.

Under proposals outlined on Friday, annuity providers will have to give customers information about more attractive products offered by rivals.

“Annuities still play a significant role in retirement provision,” said Christopher Woolard, executive director of strategy and competition at the FCA. “It’s important that consumers shop around to get the best deal for them — yet our previous work found that very few people actually did so.”

Industry operators said the FCA’s measures would put more pressure on annuity providers to offer more competitive rates.

“There will be no hiding place for those who offer poor value,” said Moneyfacts, a financial comparison website. “The only shame is that customers will have to wait until September 2017 for this new requirement to come into force, and that the FCA rule has not gone further by making shopping around for an annuity compulsory.”

The proposals were welcomed by insurers that offer annuities on the open market. “This will nudge and encourage people to shop around more than they do today,” said Stephen Lowe, communications director at Just Retirement. “The information will be placed directly in front of the customer’s face. It will be blatant.”

However others warned the measures contained were “significantly flawed”. This was because they obliged providers only to compare standard annuities, and not enhanced annuities, which can pay a much higher income to those in poorer health.

“The risk here is that people will anchor themselves to the best rate when there is likely to be a better deal out there for significant numbers of people who have health conditions,” said Andrew Tully, technical director with Retirement Advantage, a pension provider.

The number of companies quoting for open market annuity business has declined sharply over the past couple of years. “It is a very difficult market to operate in,” said Tom McPhail, head of retirement policy at broker Hargreaves Lansdown.

Insurers in the market were confronted by rule changes that have given consumers more choice over what to do with their savings; low interest rates that have squeezed margins; and the EU’s Solvency II capital rules that came into force this year, he said.

According to Hargreaves Lansdown, Standard Life and Liverpool Victoria have left the market this month while Prudential and Aegon pulled out earlier this year.

Insurers angered by premium tax increase in Autumn Statement

Posted on 23 November 2016 by

Insurers have reacted angrily to the chancellor’s decision to raise insurance premium tax by a fifth, from 10 per cent to 12 per cent in the Autumn Statement.

The tax, which is levied on general insurance policies such as home, motor and health, stood at 6 per cent just over a year ago but had been increased twice since then. 

The latest increase will take effect next June and will raise about £840m in extra tax revenue per year. But while the proceeds of the last increase were earmarked for flood relief projects, Philip Hammond would only say that the latest rise would be used “to fund spending commitments”.

In his statement, Mr Hammond pointed out that: “Insurance premium tax in this country is lower than in many other European countries, and half the rate of VAT.”

Huw Evans, director-general of the Association of British Insurers, said the increase was a hammer blow for the hard pressed. “It will hit consumers and businesses alike, hurting those who buy business, motor, property, pet and health insurance,” he said.

Mr Hammond attempted to soften the blow by reiterating the government’s plan to cut the amount that insurers have to pay for whiplash injuries. Proposals were unveiled last week to wipe £1bn off the cost of claims. If passed on to consumers, that would cut about £40 off the cost of an annual car insurance policy. 

Amanda Blanc, chief executive of Axa UK, called the insurance premium tax increase: “an unwarranted attack on millions of people simply looking to protect themselves. 

“This is a classic case of the government giving with one hand, in the form of whiplash reforms, and taking with another,” she said. “The affordability of insurance is being fundamentally threatened. The country is already underinsured and ever rising insurance taxation could have the unintended consequence of making this situation even worse.”

According to Deloitte the latest increase will cost a family with a house and two cars an extra £21 per year, leaving them with a total annual IPT bill of £126. Before the first of the recent increases, which took effect last October, Deloitte says that the annual bill was £63. 

“There comes a point where people don’t insure,” said Daniel Lyons, tax partner at Deloitte. “We may not be there yet but the more expensive insurance becomes, the more there’s a possibility that people will be less likely to take out a policy. From a public policy point of view, I’m not sure that’s a good thing.” 

There was some better news for the industry elsewhere in the government’s announcements. Draft regulations were published on Wednesday that would allow insurance linked securities to be issued in the UK. These securities allow investors to back risks directly, rather than going via an insurance company, and are becoming increasingly popular in specialist commercial insurance markets. 

Inga Beale, chief executive of Lloyd’s, the insurance market, said: “It is clear that London should be competing in the ILS market which will bring considerable benefit to the London market as a whole, so we welcome today’s announcement from the government. ILS capital has been growing, particularly in global reinsurance, and the London market has the expertise and talent to select the risk that it wants to invest in.”

Insurance premium tax hike ‘will cost families extra £21 a year’

Posted on 23 November 2016 by

Insurance companies and consumers who want to protect their assets were among the bigger victims of Philip Hammond’s Autumn Statement and they are clearly not happy about it, as Axa branded a further hike in the insurance premium tax from next summer as an “unwarranted attack” on the industry.

To recap, Mr Hammond intends to raise the levy – a tax on general insurance premiums including car and home insurance – from 10 per cent to 12 per cent from June next year.

Amanda Blanc, chief executive of Axa UK, pointed out the move is the third increase in 18 months, calling the latest hike “an unwarranted attack on millions of people simply looking to protect themselves, their families and their key assets”.

“This is a classic case of the Government giving with one hand, in the form of whiplash reforms, and taking with another,” she said referring to Mr Hammond’s pledge in the Autumn Statement to legislate to end the “compensation culture” around such claims – a move the industry welcomes.

“The affordability of insurance is being fundamentally threatened,” she added. “The country is already underinsured and ever rising insurance taxation could have the unintended consequence of making this situation even worse.”

Daniel Lyons, a tax partner at Deloitte, suggests the industry would have been caught off guard by the move, given that the tax had already been raised in the Budget earlier this year. He said:

This will cost the average family – with a house and two cars – an extra £21 a year, bringing their total IPT [insurance premium tax] cost to £126 annually. In less than two years, the IPT rate will have increased by 6%, doubling the rate. This will be unwelcome news for both insurers and consumers.

Simon McCulloch, director of comparethemarket.com, a price comparison website, said:

Our estimates are that, as a direct result of the Government’s increases in IPT, drivers will have to fork out an extra £109 than they paid two years ago to pay for their insurance. We calculate that the average annual motor premium will cost more than £700 going into the new year.

Generali: splash the cash

Posted on 23 November 2016 by

Phillipe Donnet was touted as the continuity candidate when he was appointed chief executive at Generali. He has stuck to the plans laid out by his popular predecessor, Mario Greco — yet Generali shares have fallen 12 per cent since he took over. Rival Zurich, now run by Mr Greco, has risen by more than a fifth.

The underperformance is partly down to domicile, which Mr Donnet can do little about. Italy remains the insurer’s largest market, and investors have tired of its volatile politics and slow-motion banking crisis. The imminent referendum on constitutional changes has only added to their aversion.

Like its peers, Generali must deal with low interest rates and uncertain growth prospects. Mr Donnet, however, brings experience of operating in a low interest rate environment from his years spent in Japan.

On Wednesday he reiterated targets announced last year — an annual return on equity of 13 per cent and cumulative free-cash flow of €7bn between 2015-18. Job cuts and other cost savings are expected to harvest an additional €200m per year by 2019. And there will be an extra one-off benefit of €1bn from disposals, mostly from exiting smaller markets.

The cost cuts should contribute to cash flow and underpin dividends rather than paying for pricey acquisitions. Generali has pledged to pay out at least €5bn over four years, equating to €0.83 per share per year.

That sounds a very similar strategy to those adopted by its rivals, yet its promised dividends imply a yield of nearly 8 per cent — well above the 5-6 per cent offered by European rivals.

That difference looks too wide. True, there is the lingering uncertainty surrounding Mediobanca’s intentions. It owns 13 per cent and has appointed several board members but the bank says it plans to trim this stake. For those willing to look past country risk, Generali looks attractive.

Email the Lex team at lex@ft.com