In a recent report published by the International Monetary Fund (IMF) on global financial stability there was a worrying outlook. The issue was not a further Greek crisis or struggling Chinese growth but rather the now high-risk life insurance sector of Europe and in particular Germany.
Life insurance has formed the backbone of German long term savings for over two centuries, providing guaranteed returns for millions. However the IMF has noted that the failure of a single one of these firms “could trigger an industry-wide loss of confidence” and “could engulf the financial system”.
The industry manages over €900bn in assets and earns more than €90bn in premium income annually. However a major challenge faced by the insurers is the persistence of low interest rates that constrain investment returns. A second challenge faced by the company is the management of their guaranteed long-term policies. The first major concern is that guaranteed rates far outstrip today’s marginal investment returns. The government has tried to introduce new legislation to counteract this imbalance resulting in a cap of 1.25%. However due to the long-tail of the business (typically 30 years) the average guarantees still remain unattainably high at 3.2%. Comparing these guarantees with the 0.14% yield on 10-year Bunds it becomes clear the strain felt by many German Life Insurers. A second issue arises due to a large mismatch between assets which generally have a term of 9 years, and liabilities which have an average term of 20 years.
The ratings agency Moody’s further predicts that investment returns are likely to fall for the next three years. Concurrently attracting new business has proved difficult for the companies as the lower guaranteed returns appear unappealing. A Bundesbank stress test further found that a third of businesses will be short of capital if the current financial climate persists.
However a private equity group Cinven is attempting to purchase many life insurance books in the German industry and thus provide mass relief to the industry. This is a similar move that was seen in the UK by companies like Phoenix and Guardian.
Cinven already offers many unit-linked life insurance contracts but is looking to expand and in the process is buying up traditional guaranteed life insurance contracts to combine these unwanted portfolios and their current holdings.
Cinven understand the considerable risk in taking up many discontinued products but have a steady track record in their dealings. In 2015 the company sold Guardian Financial Services, a closed book of UK life insurance, to Swiss Re for £1.6bn effectively quadrupling their investments. They have also been interested in purchasing Old Mutual’s UK wealth management arm with an initial offer made.