15 May 2019
FBD Insurance: EU launches investigation into the insurance industry
The EU Commission yesterday opened a formal anti-trust investigation into the Irish insurance industry, to determine whether its Insurance Ireland association was operating as a cartel in regard to its proprietary InsuranceLink data pooling system, particularly in regard to the provision of motor insurance.
The EU alleges that the closed membership of the InsuranceLink data pool is potentially anti-competitive in nature as companies seeking to enter the Irish motor insurance market may be unfairly prevented from accessing this data pool and so are put at an unfair competitive disadvantage.
The formal investigation follows EU inspections of the Insurance Ireland offices in 2017 seeking more information on the use of the InsuranceLink system which pools information on customer claims from membership insurance groups, and facilitates the detection of potentially fraudulent behaviour by claimants, also ensuring the accuracy of information provided by potential customers to insurance companies and/or their agents. This is particularly useful for incumbent insurance operators given the significant level of insurance claims inflation seen in the sector over the last decade.
Insurance groups using the InsuranceLink system include AIG, Allianz, Aviva, Axa, FBD, IPB, Liberty Mutual, RSA, Travelers and Zurich, amongst others. We would expect any investigation to take potentially years before reaching a decision, so any financial or operational impact is only likely in the medium term.
Irish Banks: AIB and KBC both cut deposit rates
In a further sign of the upside potential for NIM from renewed liability repricing, AIB and KBC both announced deposit rate cuts yesterday on their regular saver products, with AIB trimming its headline monthly-saver product by 10bps (to 0.9%, effective end July) and KBC cutting its monthly-saver offer by 25bps (to 1.75%, effective end May).
The rate cut announcements, though modest in nature, highlight the potential for continued liability repricing by all of the retail banks operating in the sector, even at this point in the cycle, particularly with a renewed wave of monetary policy dovishness coming from the ECB in recent months.
This supports our view of a benign or supportive NIM backdrop for all of the Irish retail banks (we expect AIB to report NIM of 245bps in FY19E and 250bps in FY20E, vs 248bps in FY18), in spite of excess liquidity issues faced by almost all of them and despite some signs of heightened competitive pressures within the mortgage market (mainly from new entrants).
Here we go again
UK government sources have indicated that there will be a further vote in the British House of Commons on Brexit early next month. Specifically this will be in the form of the Withdrawal Agreement Bill (the piece of legislation that will implement the EU Withdrawal Agreement), with the intention to introduce it to parliament in the week of 3 June. A second reading and a vote are planned the following week. This will take place irrespective of whether or not the Tories and Labour enjoy any success in their cross party talks.
The Commons arithmetic remains difficult for the British government with the previous ‘meaningful vote’ on the Withdrawal Agreement on failing by 58 votes on 29 March. It’s no real surprise then there has been little or no reaction from sterling on the release of the news. The benchmark EUR/GBP rate is sitting just below the pivotal £0.87 level, after a full week of sterling selling pressure following on from the lack of any substantial progress in cross party negotiations.
Chinese data disappoints
Investors have been presented with an all-round disappointing set of April data for the Chinese economy. Figures showed that annual growth in industrial production had eased from a 4½–year high of 8.5% to 5.4% in April, matching November’s outturn as the weakest since the financial crisis. Retail sales saw a more pronounced slowdown to 7.2% from 8.7% previously, marking the weakest print since 2003. Additionally, fixed asset investment growth edged down to 6.1% on a year-to-date basis, down from 6.3% seen in the three months to March.
The month to month volatility may reflect some element of seasonality, but even discounting this we judge that it would be premature for the authorities to rein back on stimulus. Recall that the strength of March’s data, which included decent Q1 GDP, prompted a sell-off in Chinese equities as investors worried that it would mean Beijing would resultantly not introduce any further supportive measures. Following the figures, the Shanghai Composite is up 2% so far today after the S&P 500 recovered 0.8% yesterday.
UK unemployment at near 45 year lows
The UK unemployment rate slipped down to 3.8% in March (3m average) from 3.9%, against consensus and Investec estimates of an unchanged rate of 3.9%. This is the lowest rate since January 1975. Employment rose by 99k over the quarter to a new record level of 32.7m. While this is of course good news, the implications for productivity growth, which has been woeful in the post-financial crisis period, are less benign.
On the pay front, ex-bonus earnings growth was on expectations, softening marginally to 3.3% (3m yoy) from 3.4% in February. However weaker bonus payments resulted in a sharper retracement in headline earnings growth to 3.2% from 3.5% in February (consensus 3.4%, Investec 3.5%). In summary, conventional metrics are showing a continued tightening in the labour market, but signs of stronger pay growth are limited.