It marked a major shift from the past and one that Germany's financial services regulator, BaFin, wasn't going to take lightly. A few weeks ago, after 15 months of careful examination, the regulator gave the green light for Basler Versicherungen to transfer a portfolio of more than 100,000 life insurance policies to the independent transactions platform Frankfurter Leben Group.
The arduous process could soon become routine for the financial regulator. That's because the deal – referred to as a “runoff” in the industry – could be just the beginning of a larger wave of transfers.
Many life insurers, struggling to make a living in today's era of record low interest rates, are desperate to offload at least some of their old-fashioned life insurance policies. Financial firms like Frankfurter Leben Group are like sharks circling the waters – all too happy to snap up a bargain when they see one.
“We calculate that this year will see a new high-point in runoff deals,” said Arndt Grossmann, the chairman of German runoff specialists Darag.
Welcome to the closed society of financial transactions. The new deals being brokered create no new business or policies. In a "runoff" trade to external settlement platforms, the aim of these groups is simply to acquire existing policies. The job of regulators like BaFin is to ensure that policyholders don't get a raw deal in the process.
I'm sure we'll see more transactions in which insurers offload parts of their life insurance portfolios, and place them in the hands of platforms like Viridium, Athene or Frankfurter Leben. Michael Klüttgens, Willis Towers Watson, insurance arm
Until now these trades have played much less of a role in Germany – less than a third of traditional policies are sold off, compared to nearly half in Britain for example. But under the shadow of low interest rates, they're taking on a new significance.
It's not just low interest rates pushing the new market for transfers. Tighter capital requirements being foisted on insurance companies, under a new legal framework known as Solvency II, are also encouraging insurers to shed some of their older policies.
All of that plays into the hands of a company like Frankfurter Leben – majority-owned by Chinese financial investor Fosun – as well as rival firms that are essentially doing the same thing.
“I'm sure that we'll see more transactions in which insurers offload parts of their life insurance portfolios, and place them in the hands of platforms like Viridium, Athene or Frankfurter Leben,” said Michael Klüttgens, head of the insurance division of Willis Towers Watson's German operations.
Frankfurter Leben's boss Bernd Neumann expects the acquisition of the Basler portfolios will likely be just be the start of a series of deals: “There's already plenty in the pipeline and the approvals processes have gone very well so far,” he told Handelsblatt.
There's already another takeover target in its sights: Back in September the settlement platform agreed with Düsseldorf-based Arag to acquire 92 percent of its life insurance subsidiary, Arag Life. BaFin still hasn't approved that transaction.
Frankfurter Leben's biggest competitor, the Viridium Group, is already a step ahead. In Viridium, which was founded in 2013, supervisors already feel they have a reliable partner. BaFin has already backed its handling of portfolios being sold by Heidelberger Lebensversicherung and Skandia Life Insurance.
“After the rollout of completely new IT systems and powerful financial and controlling processes in 2015 and 2016, we are currently adding the last piece of the puzzle: We are transferring the last portfolios into the new stock control system,” said Heinz-Peter Roß, the chief executive officer of Viridium.
Mr. Roß said his company is now managing more than 800,000 of its own life insurance contracts and almost 100,000 additional contracts for third parties.
But it's not stopping there. According to industry sources, Viridium has around 100,000 more life insurance contracts in its sights from former insurer Mannheimer Leben, which recently went bankrupt. Sources say a spin-off of the portfolio, currently held by the rescue company Protektor Life Insurance set up in the wake of the insolvency, is likely to take place in 2017.
There has been no confirmation of the deal from Viridium. The case shows just how long and drawn out such a process can be – the word from Protektor is that the transfer has been under discussion since late 2015 – even though the company has already curried favor with the authorities.
Shedding their old portfolios to free up resources increasingly pays off....Specialist firms like Viridium Group or Frankfurter Leben see it as a huge business opportunity.
It's been a bitter turn of events for many German life insurers, which in the days of higher interest rates considered such old classic policies their crown jewels. Guaranteed life insurance policies have long been popular in Europe's largest economy. Now these policies, many of which still guarantee their owners a whopping annual rate of more than 3 percent, have become a financial liability.
On one hand, the insurers are struggling to meet their guarantee promises of previous years, after the major central banks have pressured interest rates to record lows. On the other hand, regulators are tightening the screws to make sure the insurance companies don't go under. New regulations for the capital resources of the industry, under the title Solvency II, have required insurance companies to set aside larger sums of reserves to back their old contracts. That considerably limits the financial scope of the companies.
Specialist firms like Viridium Group or Frankfurter Leben, on the other hand, see it as a huge business opportunity. In particular, thanks to better IT systems in which hundreds of different tariffs can be calculated automatically, they believe the portfolios can be more efficiently managed, thus bringing costs down. That makes them cheaper to manage and more profitable than they were for the original owners.
“Runoff platforms offer cost advantages,” said Dirk Spenner, managing director for northern and central Europe with the British reinsurance broker Willis Re.
Viridium boss Mr. Roß says a radical upgrade of IT systems is the only way that life insurance contracts will still be manageable in 10 or 20 years – at least in a way that clients will be satisfied with the performance and services on offer. “That's why we have decided, from day one, to draw up IT and inventory management completely from scratch,” he said.
And so there's a win-win here that means both sides have an interest in keeping the new wave of transactions going. For the traditional insurers, shedding their old portfolios frees up resources for other things. And for the runoff platforms, the larger the volume of transactions they snap up, the more profitable they get.
The trade is also attracting plenty of foreign investors. The largest investor in the Viridium Group, alongside its minority shareholder Hannover Rück, is the London-based private equity firm Cinven, which already knows this business from the Britain, where it is more common.
Behind Frankfurter Leben is the Chinese investor Fosun, the first Chinese company to enter the German insurance market. The Chinese have given Frankfurter Leben an investment horizon of 20 years. That's also important, said the Frankfurter Leben CEO Mr. Neumann. Life insurance needs steady, long-term investors, he said.
No life insurance customer should be worse off after a transfer, BaFin insurance overseer Frank Grund has publicly said.
All this interest is one more reason why BaFin is taking an especially close look. While the dealmakers have said little about the process publicly, sources say the regulator set high compliance requirements for platform companies right from the start. The goal: No life insurance customer should be worse off after a transfer, BaFin's insurance overseer Frank Grund has said publicly.
Good thing BaFin has a solid reputation in Germany. Lars Gatschke, an insurance expert at Germany's federal agency for consumer protection, is open to the trend as long as the country's top supervisor is watching.
“I wouldn't want to demonize the sale per se,” he said. “I have the impression that BaFin has a clear idea of how takeovers should be regulated and that the body carefully assesses the interests of the consumer.”
That's also what the 128,000 customers of Basler Lebensversicherung will be hoping, whose policies are now in the hands of Frankfurter Leben.
Carsten Herz covers the insurance and asset management industries for Handelsblatt. Christian Schnell covers financial markets, as well as the auto industry. Both are based in Frankfurt. To contact the authors: [email protected] and [email protected]