Generali's sale of its €1 billion-valued German life insurance business has been well received by analysts, and more sales of closed German life business could be on the way.
The Italian insurance group said July 5 that it was selling 89.9% of Generali Leben, which has reserves of €37.1 billion, to Viridium Group GmbH & Co. KG, a buyer of closed, or runoff, life insurance portfolios that is owned by private equity house Cinven Group Ltd. and German reinsurer Hannover Re.
Generali will continue to write life insurance business in Germany through Generali Deutschland, but will focus on unit-linked, hybrid and protection products, rather than business offering guaranteed returns to shareholders that existed in its runoff portfolio.
More deals expected
Insurance firms in Europe, and Germany in particular, have been shifting away from offering products that have guaranteed returns because persistently low interest rates have rendered it less profitable and more capital intensive. Germany's guaranteed rates were among the highest in Europe.
Insurers are reducing guarantees on new contracts, but their back books are still full of business with guaranteed rates that were set when interest rates were higher. Some are therefore keen to offload these closed books of business to runoff buyers.
Rating agency Fitch said it expects more deals to follow the Generali transaction.
"We forecast that runoff specialists will manage more than half of closed life business in Germany by 2022, compared with about 25% currently, as insurers start to find the costs of managing shrinking portfolios an increasing burden," it said. Fitch added that runoff buyers such as Viridium are able to manage closed portfolios better than their original owners because they can merge business from several acquisitions and generate economies of scale.
The rating agency said about €130 billion of Germany's €1 trillion life insurance market is in runoff, and expects this figure to grow as low interest rates depress insurers' investment income, which funds the guaranteed returns, and because of greater capital requirements under the European Union's Solvency II insurance capital regime, which came into force in January 2016.
Moody's agreed that more deals could follow Generali Leben. The rating agency said July 6 that German financial regulator BaFin would be "especially diligent in its scrutiny" of the deal as it is "the largest of its kind in Germany, and could pave the way for further back book consolidation in the German life market."
Generali said that, in addition to cutting exposure to interest rates, the deal with Viridium had boosted cash by €1.9 billion, as Viridium will pay back €822 million of loans to Generali. The transaction will also boost its group Solvency II coverage ratio by 2.6 percentage points. Generali's regulatory solvency ratio was 211% as of March 31, 2018.
"We view this transaction as positive both strategically and financially, in particular, lowering the volatility of the group solvency, reducing balance sheet risk and removing some of the overhang of the German life business," UBS analyst Colm Kelly said in a research note.
Dominic Simpson, senior credit officer at rating agency Moody's, said the deal was credit positive for Generali as it will reduce the group's exposure to interest rate risk and increase liquidity at the holding company level.
Fitch said Generali will still have a strong position in Germany, through Generali Deutschland, focusing on unit-linked, hybrid and protection products.
Generali said contractual obligations to policyholders remain unchanged and that retail customers would continue to receive "excellent service standards" from Viridium, supported by a service level agreement with Generali Deutschland. It added that Generali would keep a seat on Generali Leben's board thanks to the 10.1% stake it is retaining.