Private equity group Cinven is planning a raid on one of the least fashionable parts of the insurance world. The firm is aiming to buy up books of life insurance business in Germany, where a combination of generous promises and low interest rates have left many insurers looking at a bleak future.
The move could spark the sort of consolidation that is common in the UK, where the likes of Phoenix and Guardian (a former Cinven investment) buy up closed books of life insurance business.
“This is a model that can go to other European countries,” says Rory Neeson, senior principal at Cinven. The firm already owns a life insurer in Germany called Heidelberger Leben which specialises in unit-linked policies, where customer returns rise and fall with the markets. A move into the more problematic world of guaranteed business would be a new departure.
“We started with unit linked business which allowed us to build a platform. Now we can also focus on consolidating traditional, guaranteed books of life insurance policies,” says Mr Neeson.
Guaranteed returns are part of the investment culture in Germany, but many insurers have found that their promises have been overgenerous. “There are two features that are particularly strong in Germany. One is a mismatch between the duration of assets and liabilities, and the other is a reliance on high guarantees,” says Stephan Kalb, senior director at Fitch Ratings. “The market is shifting towards other products, but it is moving slowly”.
According to Fitch, the average guarantee in place is about 3 per cent. Yields on the insurers’ investment portfolios are still above that but as old assets mature and new ones are bought in the market at much lower rates, the gap is falling. By the 2020s, many insurers may find that they are not generating the returns required to meet their promises.
Nevertheless, Cinven believes it has seen an opportunity to snap up unwanted portfolios from other insurers and combine them.
“It is a large, very fragmented market where many life companies are under enormous pressure as they have taken interest rate risk,” says Mr Neeson, who says that there are 98 life insurers operating in Germany. “Life insurance consolidation in Germany is going to be around for a long time.”
Cinven, one of Europe’s biggest buyout groups, has been making increasingly ambitious bets in financial services, led by its investments in life insurance.
“We like the more highly regulated, capital-intensive end of the financial services sector,” says Mr Neeson. Because of these features, relatively few private equity investors bid for assets in the sector, compared to the competition for cast-offs such as payments systems or trust administration services, which absorb less capital to run.
Other buyout groups that have bet on European insurers include Apollo, which bought Delta Lloyd’s German unit last year, and CVC, which sold out of Brit Insurance with Apollo also last year.
Last year Cinven sold Guardian Financial Services, a closed book of UK life insurance, to Swiss Re for £1.6bn, returning four times the money it invested when it bought the business from Aegon in 2011.
Cinven’s other financial services investments have included a stake in Avolon, the aviation leasing company which was sold to China’s HNA for $7.6bn last year, and Partnership, the UK annuity manager that was forced to shift its business model after being hit by pension reforms two years ago.
Cinven also recently made an offer for Old Mutual’s UK wealth management arm, which could be sold under the insurer’s break-up plan. The private equity firm Warburg Pincus is also bidding, according to people familiar with the matter.
Source: Financial Times