Anyone who took out life insurance in the German Civil Service Insurance (DBV) 20 years ago as an old age insurance, thought he was in a solid company with a long tradition. Ultimately, the company dates back to the Army and Navy life insurance of 1871. Government officials were among the most important clients.
900,000 policyholders can now rub their eyes. Because your new contractual partner is called Athora Lebensversicherung. The group parent company is headquartered in Bermuda and is among many major international investors. In the future, Athora will manage € 19 billion in contributions and investment income for customer pensions.
Until 20 years ago, there was DBV on the policy, but it was the Swiss company Winterthur, which in turn was owned by Credit Suisse. In 2006, the company was taken over by Axa. And the Parisians sold their old contracts to Athora for 660 million euros. Wiesbaden, Zurich, Paris, Bermuda: DBV customer retirement contracts have taken an interesting journey.
The sale of closed life insurance contracts, long unwelcome in Germany, is no longer uncommon. In the industry, this is called external drainage. A dam burst in 2019 was the sale of Generali’s life insurance, now Proxalto, a company specializing in processing Viridium, most of which is owned by London-based financial investor Cinven.
At that time, this affected 4.8 million customers with a credit balance of € 60 billion. This was followed by numerous sales of smaller portfolios by life insurers and pension funds.
In 2022, there were suddenly two large deals. In June 2022, Zurich sold 720,000. EUR 20 billion commission contracts with former Deutsche Bank Zurich subsidiary Deutscher Herold, also Viridium. Now there’s a business between Axa and Athora.
Other firms are considering a similar step, even as interest rates are now rising and easing the pressure somewhat. Life insurers are concerned about the high cost of IT conversion if they continue to manage their old portfolio on their own in the face of new regulatory requirements. Because the supervisor wants a lot more information, and also wants clients to be informed differently, for example about the environmental friendliness of the investment. This is difficult with older systems.
Then there is the capital market risk that life insurers have on their books with old wallets.
In the vast majority of cases, the termination does not make sense
Initially, nothing will change for customers as a result of the sale. Because the buyers of these shares are required to continue their contracts exactly as they were entered into. Almost all contracts currently sold by Axa have a guaranteed interest rate of 3.2%, which must also be paid by Athora.
In most cases, the termination does not make sense and has negative consequences. In any case, you should seek neutral advice beforehand. However, it is wise to read the annual status reports carefully and compare them with reports from previous years. In case of a sharp deterioration, a review by consumer centers and other organizations, as well as a complaint to the financial regulator Bafin, will be useful.
Axa and Athora emphasize that they want to serve customers as they have been doing so far. Both companies expect their deal to overcome all obstacles, including Bafin’s approval, in the fourth quarter of 2023.
About 100 Axa employees are currently involved in managing this portfolio, which was closed to new businesses in 2013. You should continue this task until 2028 and then work elsewhere in the group, said Marc Daniel Zimmermann, Chief Financial Officer of SZ. Axa is not planning layoffs.
Contract management IT will also be provided by Axa in the coming years, which will charge a fee for it. Then the contracts should move to the new system.
“That justifies the price.”
Athora pays 18 times the profit for 2022, which is a proud price. Can a liquidator pay so much then squeeze a lot out of the portfolio through asset management fees? Zimmermann denies this, it is an experienced company with a portfolio in Germany, and Bafin is also there. Zimmermann believes that the price is not too high. “Inventory is of great value,” he said. It is managed cleanly and has a good investment strategy. “That justifies the price.”
For large investors, contract portfolios are attractive due to the billions in reserves. Because these funds are very stable. For decades, German life insurers have enforced laws that hardly give customers the option to cancel. If so, they are losing a lot of money. It is only over the years that the sums invested decrease when the insured leaves after the termination of the contract.
Until then, however, reserve management promises them high returns, primarily from the management fees charged by their associated management companies. Athora has a “strategic partnership” with Apollo Global Management’s asset manager and its life insurer Athene. In 2019, investors sued Apollo in US courts. The allegation was that the asset manager “practically excluded” the high-fee life insurer and its customers. Such behavior would prevent Bafin in Germany, according to the insurers involved.
By selling, German life insurers are showing that their once sacred business model has vanished in the long phase of low interest rates, the classic guaranteed interest rate life insurance. Most firms no longer sell such contracts, but rely on unit-linked offerings and other forms of contract where it is the customer, not the insurer, who bears most of the capital market risk.
Old stocks are sold or processed as internal runoff. Ergo manager Frank Wittholt believes that 90 percent of life insurance in Germany is de facto withdrawn. What was once praised as exceptional, namely long-term savings contracts with guaranteed returns and thus safe private pensions, are coming to an end.