Escape hatch

Generali breaks a taboo by unloading its German life portfolio

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No assurances on guaranteed returns. Source: Mauritius Images

No one can accuse Giovanni Liverani of making rash decisions. For the best part of two years, the boss of the German subsidiary of Italian insurer Generali, deliberated the sale of its legacy life insurance portfolio. As late as January, Mr. Liverani was still considering winding up the policies internally, rather than unloading the ailing division, Generali Leben.

What a difference six months can make. On Thursday, the group announced it will hive off Generali Leben and its four million active life-insurance policies for €1.9 billion ($2.2 billion) to Viridium, a runoff specialist owned by buyout group Cinven and reinsurer Hannover Re. Mr. Liverani said the proceeds would be reinvested in the business. Valuation is clearly at a deep discount: The outstanding life insurance policies have a face value of €37.1 billion.

The politically-charged deal is Germany’s largest to date. Gerhard Schick, a financial expert for the Green party, said that policyholders need greater legal assurance that insurers will honor their commitments. German financial regulator Bafin announced it will review the deal in detail, a process that could take months.

Under the agreement’s terms, Viridium will buy 90 percent of Generali Leben, and Generali will retain a 10 percent stake in the company. The Italian group’s investment unit will manage Generali Leben’s assets for a five-year period, for a total fee of €275 million.

06 p28 Shedding life’s ballast-01

Breaking the stigma

Up to now, runoff specialists such as Viridium and Frankfurter Leben – the latter owned by Chinese investor Fosun and Germany’s BHF Bank –  have only dipped their toes into the German market. The main reason has been limited access: German life insurers have been reluctant to divest older policies, fearing a loss of face. Last fall insurer Ergo, a unit of Munich Re, stopped the sale of six million life policies at the last minute amid a backlash from customers and politicians. Ergo now maintains it can manage these policies profitably, by joining forces with IBM.

But the Generali deal, thanks to its sheer size, stands to break the runoff stigma in Germany once and for all. Michael Klüttgens, an insurance expert at brokerage Willis Towers Watson, says that low interest rates, cost pressures and new regulations will force more German life insurers to dispose of all or part of their portfolios. Ratings agency Fitch predicts that the volume of German life policies in runoff will balloon to €180 billion by 2022, from €90 billion last year.

On the face of it, policyholders shouldn’t have cause to worry, said Lars Gatschke, an insurance expert at German consumer watchdog VZBV. Transferring life policies to Viridium doesn’t change their terms, he noted; in fact, customers could benefit from falling costs, as the company will have more cash to invest for customers.

The yoke of guarantees

For many German insurers, these legacy policies have become a financial albatross. Interest rates have hovered around zero for years, making it difficult for life insurers to generate enough returns to meet guaranteed payouts to policyholders, often as much as 4 percent, agreed to when rates were higher. In addition, insurers’ computer systems, some of which are badly outdated, make it tough to manage portfolios profitably. Pointing to their whizz-bang IT systems, the runoff administrators promise lower costs and to pass some of the savings to customers.

Recently, the German finance ministry revealed that 34 out of 85 of the country’s life insurers faced heightened scrutiny due to risks of “medium to long-term financial difficulties.” The Italians admitted that Generali Leben was on the watch list.

Commitments to long-term payouts tie up insurers’ capital in a fragile industry, sapping their investment and earnings potential. Many have ceased issuing new life policies with these guarantees, which many Germans rely on to enhance their retirement income. Generali Leben followed suit at the start of the year, as part of a sweeping revamp of its German business. Its venerable Aachen-Münchener and Central Kranken brands are being phased out, and in the future, the company will sell life coverage without guarantees via financial advisors DVAG, in which the group holds a 40 percent stake.

Critics see a cautionary tale in the industry’s history in Britain, where insurance runoffs have been common for decades. Falling interest rates in the late 1990s led many UK insurers to sell their life endowment vehicles to administrators, who promptly cut dividend payouts to their bewildered clients. Dubbed “zombie funds,” these policies are the last thing the German regulators need, given the many life insurers already on their last legs.

Carsten Herz covers asset management and insurance for Handelsblatt in Frankfurt. Frank Drost is an editor in Berlin, covering financial supervision and banks. Jeremy Gray adapted this story into English for Handelsblatt Global. To contact the authors: herz@handelsblatt.com and drost@handelsblatt.com

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