Editor's note: Originally published on 30 June, 2014
by Simon Lack
Denis Kessler, CEO of Scor, a large reinsurer, is the most recent critic of today's low interest rate environment. It's not only the stereotypical retiree clipping bond coupons that is suffering from current interest rate policy. Insurance companies typically hold substantial amounts of their investment portfolios in bonds, both because of regulatory requirements as well as the need to respond to claims whose timing is often unpredictable. Kessler claimed that central banks were "ruining" the insurance industry, and claimed that insurers were the unwitting victims of the aftermath of the financial crisis even though they didn't create it (AIG and its credit derivatives portfolio presumably notwithstanding).
Warren Buffett has described an insurance company's "float", that is, the premiums they receive in return for making payments in the future, as akin to being paid to borrow money. This is true
By Robert Goldsborough
In the first half of 2014, the market performance of the U.S. financial-services sector trailed the broader U.S. equity market by several hundred basis points.
Thus far this year, there have been some small bumps in the road for a sector that has enjoyed a robust comeback during the past five years, but where volatility remains meaningfully high and uncertainty even higher. While no one doubts that large banks, which dominate the financial sector, are far better capitalized than they were heading into the financial crisis, the final results in March of the Federal Reserve's annual stress test on the United States' 30 largest banks demonstrate both a lack of robustness on the part of some large lending institutions--including Citigroup (NYSE:C)--as well as the clear presence of a prominent headwind in the form of elevated compliance, regulatory, and legal costs across the industry.
Another headwind is
To understand the mispricing of Aegon (NYSE:AEG) it is useful to know a little bit about the Netherlands. It is a tiny country in Western Europe bordering the North Sea, with the U.K. close to the West and bordering Germany on the East. In the South there is another small country: Belgium. Yet Paris can be reached in just a few hours by train or car. The country has been a traders nation throughout history and it has a very open economy focused on export. It is not the norm for financial institutions of the TBTF type to be headquartered in one country but derive a majority of its revenues from another. Aegon is the exception through its TransAmerica brand.
The company's global underlying earnings before tax were €2,66 billion in 2013 with €1,69 billion or 65% derived from the Americas. Below I've included two graphs where Aegon's price development