Anyone who took out life insurance with the German Civil Service Insurance (DBV) 20 years ago for their old-age provision thought they were in a rock-solid company with a long tradition. Eventually the society dated back to the Army and Navy Life Insurance of 1871. Public servants were among the most important customers.
900,000 insured are now likely to rub their eyes. Because your new contractual partner is called Athora Lebensversicherung. The group’s parent company is based in Bermuda and is owned by a number of major international investors. In the future, Athora will manage the 19 billion euros from contributions and investment income for customers’ old-age provision.
Even 20 years ago DBV was on the policy, but it was the Swiss company Winterthur, which in turn belonged to the bank Credit Suisse. In 2006, Axa took over the company. And the Parisians have now sold the old contracts to Athora for 660 million euros. Wiesbaden, Zurich, Paris, Bermuda: The old-age provision contracts of DBV customers have an interesting journey behind them.
The sale of closed life insurance contracts, long frowned upon in Germany, is no longer a rarity. In the industry, this is called external run-off. The dam burst in 2019 was the sale of Generali life insurance, now Proxalto, to the processing specialist Viridium, which is majority owned by the London financial investor Cinven.
At the time, this affected 4.8 million customers with a credit balance of 60 billion euros. This was followed by numerous sales of smaller portfolios by life insurers and pension funds.
In 2022 there are suddenly two big deals. In June 2022, Zurich sold 720,000 contracts with provisions of EUR 20 billion, which had been concluded with the former Deutsche Bank subsidiary Zurich Deutscher Herold, also to Viridium. Now the business between Axa and Athora follows.
Other companies are considering a similar step, even if interest rates are currently rising and reducing the pressure somewhat. Life insurers fear the high costs of IT conversion if they continue to manage the old portfolio themselves in the face of new regulatory requirements. Because the supervisor wants a lot more information and also wants customers to be informed differently, for example about the environmental friendliness of the investments. This is difficult to do with legacy systems.
Then there are the capital market risks that life insurers have on their books with the old portfolios.
In the vast majority of cases, termination does not make sense
Initially, nothing will change for customers as a result of the sales. Because the buyers of these stocks are obliged to continue the contracts exactly as concluded. Almost all of the contracts now sold by Axa have a guaranteed interest rate of 3.2 percent, which Athora also has to pay.
In most cases, termination does not make sense and has negative consequences. In any case, you should seek neutral advice beforehand. However, it is prudent to read the annual status reports carefully and to compare them with those of previous years. In the event of rapid deterioration, a check by consumer centers and other organizations is useful, and a complaint to the financial regulator Bafin can also be useful.
Axa and Athora emphasize that they want to serve customers the same way they have up until now. The two companies expect their deal to clear all hurdles, including Bafin approval, in the fourth quarter of 2023.
Around 100 Axa employees are currently involved in the management of this portfolio, which was closed to new business in 2013. You should continue to perform the task until 2028 and then work elsewhere in the group, said CFO Marc Daniel Zimmermann of the SZ. Axa is not planning job cuts.
The IT for managing the contracts will also continue to be provided by Axa in the coming years, which will collect a fee for this. Then the contracts should move to a new system.
“That justifies the price.”
Athora pays 18 times the profit for the year 2022, a proud price. Can the liquidator pay so much because he then squeezes a lot out of the portfolio through fees in asset management? Zimmermann denies that. It is an experienced company with a portfolio in Germany, and after all, the Bafin is also there. Zimmermann does not think the price is too high. “The inventory is of high value,” he said. It is managed cleanly and has a good investment strategy. “That justifies the price.”
For the big investors, the contract portfolios are attractive because of the billions in provisions. Because these funds are very stable. For decades, German life insurers have enforced regulations that offer customers hardly any cancellation options. If they do, they lose a lot of money. Only over the years do the sums invested become smaller when the insured leave when the contract expires.
Until then, however, the management of the provisions promises high profits for them, above all from the management fees collected by their associated management companies. Athora has a “strategic partnership” with wealth manager Apollo Global Management and its life insurer Athene. In 2019, investors sued Apollo in US courts. The accusation was that the asset manager had “virtually excluded” the life insurer and its customers with high fees. Such behavior would prevent the Bafin in Germany, according to the insurers involved.
With the sales, the German life insurers show that their once sacred business model has withered in the long phase of low interest rates, the classic life insurance with a guaranteed interest rate. Most companies no longer sell such contracts, but rely on unit-linked offers and other forms of contract in which the customer and not the insurer bears the majority of the capital market risk.
The old stocks are sold or processed in an internal run-off. Ergo manager Frank Wittholt believes that in Germany 90 percent of the life insurance business is de facto in run-off. What was once praised as unique, namely long-term savings contracts with guaranteed returns and thus secure private pensions, is at an end.