The German Secondary Life Market in the Light of a Challenging Environment for Insurers in Germany...

The German Secondary Life Market in the Light of a Challenging Environment for Insurers in Germany

Ingo Wichelhaus

- CEO National -

October 6, 2015London

Topics

● State of the German insurance carrier market

● Regulatory and economic challenges for carriers

● Solvency II● The Life Insurance Reform Act (“Lebensversicherungsreformgesetz”)● Interest rate environment

● Consequences on the profitability of German endowment policies

● Impact on policy trading and investments

● Outlook

The German Secondary Life Market in the Light of a Challenging Environment for Insurers in Germany; BVZL/ELSA Summit, October 6, 2015 2

The German life insurance market

● Major pension savings market

● 87m policies● 800bn Assets under Management

● The most prevalent product: endowment policies with guaranteed interest (new business 1.25% -> existing policies up to 4%)

● Various reforms since 2005 – high political pressure on the entire sector● Since 2005, life insurance contracts have no longer been tax-free● Solvency II will take effect in 2016 ● LVRG – Reform Act for the German life insurance sector was effected

in August 2014

● Challenging new business environment due to unwillingness/inability of insurers to offer minimum interest guarantees (however Germans love guarantees!)


Moody’s Global Risk Categories for Life Insurance


Very high Risk toProfitability

High Risk to Profitability

Moderate Risk to Profitability

Low Risk to Profitability

Very low Risk to Profitability

Markets in which investment returns are already below or close to the guaranteed rate and the duration gap is high

The profits of many insurers will deteriorate, and the capital of some will deteriorate if interest rates remain low for the next five years

Markets in which investment returns are already below or close to the guaranteed rate but the duration gap is low

The profits of many insurers will deteriorate, and the capital of some could progressively deteriorate if interest rates remained low over the next five years

Markets in which insurers are well matched or are readily able to lower credited rates

The profits of many insurers will progressively deteriorate if interest rates remain low for the next five years, but the risk of losses is limited

Markets in which guaranteed products have specific features (i.e. to claw back bonuses, guaranteed rates are linked to asset performance) or in which growth is such that new business rapidly dilutes insurers’ legacy books.

The profits of insurers will deteriorate slightly if interest rates remain low over the next five years.

Markets in which the weight of guaranteed products is low and guarantees are low.

The profits of insurers will hardly deteriorate if interest rates remain low over the next five years.

Source: Moody’s (premium volume in USD bn)

GERMANYTAIWAN

NORWAY

NETHERLANDS

JAPAN423 bn USD

SOUTH KOREA

SWITZERLAND

SWEDEN

USA533 bn USD

FRANCEITALY

CHINA152 bn USD

SPAIN

SOUTH AFRICA

UK223 bn USD

AUSTRALIA

German Life Insurance Market – Questions....

How long can payment guarantees be met?

When will the first carrier be unable to meet the guarantee obligations?

How many insurers will stay in the market instead of running off the business?

Are we going to see mergers?

Will BAFIN intervene – and if so, in what way?

The German Secondary Life Market in the light of a challenging environment for insurers in Germany; BVZL/ELSA Summit, October 6, 2015 5

Fixed-income dominates life insurers’ asset allocation

Fixed Income: 92,63%Real Estate: 3,19%Equity/Shares: 2,43%Shareholdings: 0,42%Alternative Investments: 0,75%Miscellaneous: 0,59%

Source: Assekurata Market Review 2015

AAA Bonds: 34,26% AA Bonds: 27,80%A Bonds: 20,91% BBB Bonds: 9,39%High Yield Bonds: 2,09% Non Rated Bonds: 0,37%Policy Loans: 4,03% Restricted Cash: 1,16%


1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

1

2

3

4

5

6

7

8

Asset yields and guarantees are still attractive

Net interest result of life insurance companies

Fixed-income yield

perc

ent

* Source: GDV (German Insurers Association) and Deutsche Bundesbank

Guaranteed interest rate

7The German Secondary Life Market in the Light of a Challenging Environment for Insurers in Germany; BVZL/ELSA Summit, October 6, 2015

Financial strength of German life insurers well above minimum solvency rates

2011 2012 2013 2014165

170

175

180

185

190

195

Percentage

8

* Source: ProContra Online

BaFin states in August 2015: “German life insurers are ready for Solvency II“

The German Secondary Life Market in the Light of a Challenging Environment for Insurers in Germany; BVZL/ELSA Summit, October 6, 2015

Financial strength of German life insurers –development of available reserves

2011 2012 2013 201432

34

36

38

40

42

44

EUR bn


Financial strength of German life insurers –additional interest reserves to meet guaranteed interest

2011 2012 2013 20140

5

10

15

20

25

EUR bn

10

* Source: ProContra Online 2015


Source: Fitch Ratings April 2015, Versicherungsjournal, July 31st, 2015

Rating agencies are not too negative …

11

● Fitch in April 2015:

– “We estimate that at today’s low rates Fitch-rated German insurers can generate investment returns above guaranteed rates for almost a decade”

– “Low rates a risk, but German insurers can meet guarantees”

● Fitch in July 2015:

– German insurers can meet guarantees for five years in advance – they still have 20% hidden reserves in their books


The entire industry is reacting to the challenges ...


● Changing asset allocation

– Increasing share of investments in infrastructure projects

– Stronger focus on worldwide investments

– Still high reluctance to consider equity investments due to high capital requirements under Solvency II

● Financials

– Solvency rates satisfactory

– Insurers build up reserves to be able to meet minimum interest guarantees

– New business is dominated by low guarantee/no guarantee policies

– Dividend payments for shareholders withheld until reserves exceed guarantee liabilities

● Clients

– Surplus allocation decreases as far as possible to build up reserves

– Revival of the product’s mutual character

German life insurance market – protection levers

Absolute amount and structure of PH crediting rate

New business generation

Cost savings

Unrealized capital gains (“hidden reserves“ and investment strategy)

Redirection of other profit sources to investment result

Decline of the provision for bonuses and rebates (RfB)

Shareholders’ equity

Company restructuring (incl. capital injection, M&A)

In-force book transferred to protection fund/Protektor

Intervention by BaFin (reduction of policyholder benefits)

13

Source: MainFirst Research 2015


Conclusions for the German secondary market

● Life insurance companies are able to meet interest guarantees for their in-force business

– Strengthening of financials by offering new products without guarantees

– Still high reserves on fixed-income assets, which can be used as additional buffer to meet guarantees

– Additional buffers already built by carriers

– Remaining death protection after a policy sale

● High market potential for buyers: EUR 14.4bn p.a.

14

2010 2011 2012 2013 201412

13

14

15

* Source: Surrender volume in EUR bn, GDV 2015


German life insurance market – secondary market buys most profitable policies – secondary yields are even higher

12 years 20 years 30 years0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

Primary Market Premium Based IRR in %

4.68%

15

Source: Map-Report no. 873 May/2015 “Yields for maturing policies”


2.88%

3.83%

Conclusions for the German secondary market

● German secondary policies are still a highly attractive asset class– Unique and attractive risk/return ratio, especially for “in-force” policies

– Built-in inflation protection

– High liquidity through intrinsic put option

– Investor protection through German legal protection mechanism

● Challenges

– Grow the market again/achieve high purchase volumes – 2015 will be the year of turnaround!

– In case of a fast-rising interest rate environment: floater character of policies is a positive feature, but duration of insurers’ assets is long!


Thank you for your attention!

Ingo WichelhausMember of the Executive Board

Prinzregentenstraße 54 80538 München

Germany

phone.: +49 171 5642 673e-mail: [email protected]

Ingo WichelhausMember of the Executive Board

Prinzregentenstraße 54 80538 München

Germany

phone.: +49 171 5642 673e-mail: [email protected]


The German Secondary Life Market in the Light of a Challenging Environment for Insurers in Germany...

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