“We will not change our fundamental product policy. We will continue to offer the same type of low-risk products,” states Pit Hentgen, President and Managing Director of La Luxembourgeoise, on the direction his company will take as we emerge from a troublesome financial period. But first? Context. Looking back, how accurate were predictions for that period? The notion that, after accounting for investment banks and private banks first, the crisis would “devour insurance companies for dessert,” already cited and promptly dismissed a year ago by Jean-Philippe Balon of ING Life, has certainly proved wide of the mark, as by nature insurance companies are going to be more cautious than certain banks. This does not in any way mean that the insurance industry is bullet-proof in the face of crisis: far from it. The effects on the stock market have caused major adjustments for insurance companies in terms of their asset values, even where operational results have remained positive. But what has the day-to-day effect been? Hentgen and François Tesch, Managing Director of Le Foyer, gave their overviews, but first, Balon, Certified Director at the newest of the three players in the market here, on the perspective for ING Life, and the insurance industry in general.

Triangle of security

“That can be answered in different ways,” says Jean-Philippe Balon when asked about the last two years in the recent history of the insurance industry. As the president of the Life Insurance Commission at the Association des Compagnies d’Assurances (ACA), he can give more than one perspective, that of ING, but also that of the industry in general. “The life insurance sector was certainly not immune to the financial crisis during the last two years. At the same time, we were more protected than any other financial institutions, owing to some key regulations which led to better protection for the customers,” he continues. What form do these regulations take? Balon says that “the systemic problems on the banking side, where one bank lends to another, don’t apply to the insurance sector. Of course, this doesn’t mean that the last two years were perfect. They were both quite nervous for life insurance companies, especially with regards to the evolution of their assets under management.” Symptomatic of the financial industry as a whole, the results have been less notably positive than in previous years, which Balon explains is part of the process of how insurance functions: “we work on management fees deducted from the asset base in our balance sheet. If these assets decrease, the percentages received remain the same but on a lesser total amount. Thus, on the financial side, the results are lower than in previous years owing to how the market evolved. This is where we have suffered since the beginning of the crisis, and in particular since September 2008.”

Balon feels that the industry, and his company by proxy, is nevertheless in a good position to restore better financial results in 2010 and the subsequent years. “Risk is clearly less significant in the insurance sector, which could well see us show an improvement in 2009 already. From a customer point of view, it could be more interesting to invest in the insurance sector instead of the financial one due to this concrete aversion to risk.”

Where are the differences? Rather than being drawn on whether the banking industry has been cavalier or arrogant, Balon takes a different approach. “Banks are more open to taking risks and offering specific products that are difficult to understand for both the customer and the relationship manager in charge of selling the product. They may not have been fully aware of the different financial elements behind the product,” he suggests, showing the difference in communication as well as protection-policies, and continuing “the goal of the life insurance company is to work on the long-term view, not the short-term. We are not seeking to make a big profit after one or two years, but to sustain profitable results for the duration. Thus, assets have to be managed and products created while keeping this focus in mind.” In any case, insurers in Luxembourg have neither the desire nor the possibility to promote high-risk vehicles to their customers owing to regulations imposed by the supervisory body. Balon emphasises that the key issue is protecting the customer: rules governing solvency margins dictate that insurers must have a lot more capital within the company than for similar types of assets for banks.

The biggest difference, according to Balon, is the “Triangle of Security. This is a specific convention between the life insurance company, the depository bank and the control authority. This gives to the customer a privilege in case of bankruptcy of the depository bank: the assets held there by the life insurance company are protected against any debtor. Thus, the insurance customer is the highest ranking debtor: the insurance assets are separated from those of the bank. Moreover, this tripartite arrangement is specific to Luxembourg, and the strength of this was proven by the fallout from Kaupthing, where insurance assets were excluded from the bankruptcy issues.”

Concerning the coming years for ING Life, Balon is optimistic: investor confidence was shaken in the six-month period following September 2008, but indirectly when it comes to life insurance. Customers have been coming back since May, he estimates, attracted by the stability of the industry. A previously stated ambition to be the market leader in the Grand Duchy is still on track, according to Balon, owing to a diversification in the products on offer. And what is a market leader? “A combination of volume, profitability and sustainability,” replies Balon, “we have our niche products that will benefit the industry as a whole here. I hope we will have some competition on that in the future.” He smiles and concludes “then everyone benefits...”

Classical values

La Luxembourgeoise has its origins in tough times, according to Pit Hentgen. “At the beginning it was less about business and more providing services corresponding to the needs of the families and friends of the founders. Values were just as important as profit,” he states about the company founded in the years after the end of the First World War. “This is still somewhat valid, but I think the landscape may have changed somewhat,” he remarks, “especially since the late 80s with the development of the financial sector. What was for some 70 years a small company has now become a medium-sized one. Our revenues and profits have multiplied five or tenfold.” As the name may suggest, the company has decided to stay concentrated on the local market, for both life and non-life insurance. “We have always been conservatively managed, meaning that we are conservative in our investments as we have to provide long-term guarantees to our clients, particularly in the life business. However, we are up-to-date and innovative when talking about our products and the market.”

The company is not merely reactionary, however. As Hentgen points out, “we were already reshuffling almost two thirds of our investment portfolio. We sold all corporate obligations and switched almost completely in favour of  triple A,  super-national bonds. This enabled us to avoid the write-offs that plagued other businesses. In terms of our balance sheet, we were not shaken by the crisis.”Indeed, over the past couple of years, Hentgen believes that La Luxembourgeoise has been considered a safe haven, especially their life insurance business. As he points out, “we have a very strong balance sheet, reflected through good profits even in the crisis years. Furthermore, among our shareholders we have the Banque et Caisse d’Epargne de l’Etat (BCEE), which was similarly perceived as being very strong in the crisis period.” He believes, regarding companies with strong balance sheets, that private clients “have begun diversifying their assets through several institutions. Where they were clients at one bank, maybe they are now with two or three. They have also added insurance companies as legitimate institutions to keep their savings with.” To meet those demands, La Luxembourgeoise has modern savings products, some of which were introduced during the crisis, Hentgen says. But the company itself is considered a strong institution worth thinking about when diversifying savings practices, “independently of the products we offer.” Putting money aside specifically in insurance is a phenomenon he has noticed more and more since September last year, and particularly since the Belgian-Luxembourgish banks encountered their difficulties. Reinforcing the image of La Luxembourgeoise as a refuge, if there had been an “insurance run” the way there have been bank runs, it would not have been a problem for the company, as it has more than enough liquidity to cope with massive buy-backs.

Different levels of confidence

With regards to investor confidence for insurance, Hentgen believes risk perception is key. But what of a banking bounce-back?  Can insurance companies hold on to customers? For a start, as Hentgen points out, the majority of clients investing in La Luxembourgeoise are putting a portion of approximately 20% of savings there, not the whole amount. “I think what is important is our value system in the face of risk. In certain banking markets, I feel that the old bad habits would come back quickly if there was to be no re-regulation,” he says. And for the future? “One or two years from now clients could adopt the old attitude to risk and there could be a new bubble. I don’t know where, but I’m not sure people will change. We, on the other hand, will keep our conservatism, low-risk products and continue to innovate in our business.” The point is a fair one: La Luxembourgeoise has not exactly emerged bruised and brow-beaten from the crisis, but rather in a position of strength. Hentgen does believe some changes will occur in how people invest, in insurance and otherwise, but the adjustments made by La Luxembourgeoise will enhance how customer protection is communicated to them. Aside from that, the company will continue to do what it does best.

Where there has been a feeling in several quarters that the crisis is over, or at least in its concluding phase, and that optimism is returning (no comfort to those who have been affected by it), François Tesch of Le Foyer is guarded: “as encouraging as things appear, I would still be cautious for the remainder of 2009 and maybe also for 2010. After the banking system has been saved, and major banks will probably recover, the industry is still being shaken. There is still a lot of restructuring, and maybe even bankruptcies, in the pipeline. This will increase unemployment.” The view is that of the economy as a whole, but what impacts upon Luxembourgish businesses will also impact upon Le Foyer. “Another concern we have is the budget deficit, which will have to be tackled by the authorities. At some point, measures will have to be taken to close that gap, be they on spending or taxes. I hope we will have growth to absorb that effort.”In terms of lessons learnt from the crisis, Tesch believes it has “shown that there are limits for the sizes of certain types of business,” and highlights the situation where companies are “too big to be allowed to fail yet are also too big to manage properly.” He maintains that a successful enterprise must focus on its core business and not spread itself too thinly, something which seems to summarise neatly the ethos behind the insurance industry in Luxembourg.

As he remarks, “to be successful, you have to think long-term and manage your risks. Caution is required when adding businesses. It doesn’t make sense to merge insurance companies and banks, but to offer banking products through an insurance network, and vice versa, is a different question. You can have the products but you do not need to own the whole value chain.” Thus, he believes certain banking entities will be broken up and refocused on core businesses, “not only for the reasons above, but also to enable the reimbursing of government help. Assets will have to be sold, and banks will become smaller as a consequence.” This in itself is in contrast with Le Foyer. The conservative policies the company has adhered to allowed them to show good operational results in 2008, as well as turning over a profit, which itself was substantially lower than that recorded in 2007. As Tesch says, however, some insurance companies posted losses, some moderate, some cataclysmic for the companies involved. That said, when the name AIG is mentioned, Tesch is sanguine: “it’s not really comparable to us. The financial business brought them down. Our investment strategy never included subprime. We never went for expensive acquisitions and we were strongly capitalised. Our solvency ratio was a multiple of the industry average. Our existence never came close to being threatened.” That was 2008 though. What of 2009? “We are pleased with the business development on both the local and international markets. Customers appreciate the quality of our products and services, and the solidity of Le Foyer locally, while our cross-border life insurance business is picking up again, especially from France and the Nordic countries.”

Tesch sees the image of protection of portfolios, solidity and reassurance as being paramount for the insurance industry as a whole, and not just Le Foyer. And for the future, “while banks may become less creative, less risky, there will always be a major difference between them and us. We will always be concerned about the longer-term. Attitudes are different. Life insurance products have an advantage over banking products, yet fit well into private wealth management as a succession tool and for private asset management.” As a final sweetener, “you are not taxed on insurance products versus certain bank products.” And we haven’t even approached the topic of banking secrecy…