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This year European life and non-life insurers face important strategic decisions. Volatility and deterioration in macroeconomic and political factors are disrupting balance sheets, consumers and investors. Unfolding regulatory initiatives will have a pervasive influence on insurer operations. A mature insurance market across much of the landscape continues to make growth difficult to achieve.

And consumer needs and expectations are rapidly changing. These forces are combining to create considerable challenges for insurers seeking to improve both top- and bottom-line performance. Those companies that have a deep understanding of these challenges, and respond with strategic solutions, will outperform their peers.

Economic developments in Europe create significant risks to insurer balance sheets and may result in a prolonged and stagnant organic growth environment. Fiscal imbalances that guided the downgrade of sovereign debt in weaker European countries have adversely affected the balance sheets of numerous European insurers and reinsurers.

Possible sovereign defaults, which may spread to other countries and sectors, could further reduce asset portfolios. A sudden spike in interest rates would further destabilize insurer portfolios and loss reserves, challenging the ability of insurers to remain competitive in the marketplace. Finally, wider recessionary conditions could reduce consumer and business demand for insurance products and services, adding to the restrictions in top-line growth potential.

Proposed regulatory changes transforming solvency and accounting standards will affect insurers from both a capital management and operational standpoint. For instance, insurers will be compelled to rethink their business and product mix in light of the anticipated capital requirements.

Despite all the hurdles that have to be taken, there are three companies that can weather the storm.

Aegon (AEG)

Aegon is an international life insurance, pensions and asset management company based in the Netherlands. The company has businesses in over 20 markets in the Americas, Europe and Asia. AEGON companies employ over 25,000 people and have nearly 47 million customers across the globe.

Aegon reported good results for Q1 2012 with operating profits up by 3% to EUR 425 million. The U.S. business at the operating level was lower at -13%, the Netherlands -3% but a recovery in the U.K. and good growth in emerging markets compensated for this, as did favorable currency and cost cutting effects.

Revenues rose by 25% to EUR 1.8 billion. New Life business in the U.S. was higher but profitability here is not easy on current low interest rates. New Life business in the U.K. and the Netherlands was lower in sales. Free cash flow was good at EUR 805 million including exceptionals, EUR 405 million adjusted.

Net income came in at EUR 521 million. This is a jump of 59% but is helped by valuation corrections and one offs as well as ongoing cost cutting.

Shareholders funds are now 10% higher at EUR 20.7 billion. Solvability ratio is now at 201%, from 195% at the end of 2011.

Allianz (OTC:AZSEY)

The Allianz Group is one of the leading integrated financial services providers worldwide. The group serves to approximately 78 million customers in more than 70 countries. On the insurance side, Allianz is the market leader in Germany and has a strong international presence.

In fiscal 2011 the Allianz Group achieved total revenues of over 103.6 billion euros. Allianz is also one of the world's largest asset managers, with third-party assets of 1,281 billion euros under management at year end 2011.

The group delivered good results for Q1 2012 with revenues at EUR 30.1 billion, operating income at EUR 2.3 billion and net profit of EUR 1.4 billion (was EUR 0.9 billion last year), around 60% higher.

Due to less pay outs for catastrophes insured, a better result in property and casualty plus health insurance and an excellent investment result for the life business (20% above consensus) this better result was achieved. Life business was less good but, again, investment results realized were impressive.

Pricing was good for property and casualty with new business also better.

The solvability ratio is now at 183%, which is at the upper end of the required range.

Guidance is for an operating profit for 2012 of 8.2 billion, more or less the same.

Allianz keeps on delivering also in difficult times although the absence of catastrophies is a lucky stroke. The very good mix of business and geographical spread is a must nowadays.

The company has a solid worldwide insurance franchise in both non-life and life whereas capital ratios are one of the most robust in the sector, enabling Allianz to withstand challenging times.

The shares have been excellent performers within the insurance sector with a total return over the last three years of 33%. Allianz remains a good value with a P/E ratio of only 7x 2012 and a dividend yield of around 5.8%.

Zurich Financial Services (OTC:ZFSVY)

Zurich Insurance Group is one of the world's largest non-life insurers. In addition the company has a sizable life insurance business. The company offers property, accident, health, automobile, liability, financial risk and life insurance and retirement products. Its operations are mainly in Continental Europe, the U.K. and the U.S.

The company showed better than expected and solid results for Q1 2012. The operating profit rose by 61% to $1,375 billion helped of course by lower catastrophe pay outs.

Especially the non-life businesses are doing well with pricing up by 3.2 % on average. In life the growth is lacking though.

Investment returns were fine with a yield of 2.1% for Q1.

Other drivers of the better result were the U.S. and emerging markets where revenues rose by 10% to $19.63 billion.

The combined ratio was at a healthy 94.6% with 103.6% reported last year as large catastrophe losses were incurred.

Solvency ratio is now at 240%. Shareholders equity rose again and is now at $31.8 billion.

These are fine results with more repairs to the equity of the firm and a lower risk profile in the investment portfolio. Peripheral risk is minimal now. The dividend can be kept barring extraordinary events and gives the shares a dividend yield of around 8%. The shares are cheap at below 8x 2013 results expected.

Final Note

A solvency ratio according to Solvency I of around 175% is acceptable for insurance companies. All three companies mentioned in this article are well above this number. Insurance stocks in Europe are cheap and in my opinion undervalued. The companies mentioned all run an international business and are not (fully) dependent on the European debt crisis.

Source: 3 European Insurers Everyone Likes