Tough future, but strong foundations
German life firms are relying on their capital strength to sustain them against intensifying foreign competition, writes Hugh Wheelan
Competition is intensifying as earnings are squeezed in the German life industry, forcing the country’s insurers to become ever more efficient and innovative to stay afloat in the market.
Add to these factors the increasing penetration of bancassurance – now accounting for 25% of new business – as well as the slow but sure progress of foreign groups in the market, and the impression is that German life insurers face an uncertain future.
However, according to S&P, the insurers do so from a position of strength. The industry in general is well capitalised, permitting companies to adapt to the newly competitive environment.
Only four German life ratings have changed over the last year, with the notable case being the Allianz group, parent group of Allianz Leben, formally merged with Deutsche Leben last year, Germany’s clear life market leader with a 15% share. The group was awarded an AAA financial strength rating, reflecting its powerful business presence in Europe and strong capitalisation and earnings. Fellow group member Vereinte Leben is the only other AAA-rated insurer in Germany.
Gerling Konzern Lebensversicherung was upgraded from Api to AA, on the basis of a strong domestic market position and excellent financial flexibility under the Gerling group umbrella.
Colonia Leben and Nordstern Leben have had their ratings amended to NR (not rated) in anticipation of their formal merger with the new company AXA Colonia Leben, which is rated at Api, both companies’ previous rating.
Twenty four new ratings have been assigned since July 1998. With 97% of insurers in the German life market rated in the secure range the competition is evident; the rating spread shows around two-thirds in the A range, with BBB and AA scores accounting for 15% each of the market.
The requirements to enter the German market are diminishing and the attraction for large foreign financial groups with a long-term view is growing. However, the highly competitive environment means local presence, brand and distribution as well as critical mass and large economies of scale are vital for success.
Acquisition or co-operation with German companies appears to be the reasonable entrance ticket – a far cry from the days prior to the adoption of EU insurance directives, when German companies tended to shield themselves from buy-outs via cross shareholdings. Few German players though are not linked to large financial groups already.
The euro’s elimination of currency differences and shift to regulation harmony are also putting Germany on the interest list for foreign players, particularly from the US. Deregulation in the German market is facilitating this greater competition and innovation by doing away with regulation of premium rates, policy conditions and product complexity, which effectively prohibited price competition.
However, entry is not without its drawbacks. The market is overcrowded and the intense competition has badly hit profitability, so a rapid return on entry investment is unlikely.
Nevertheless, Italy’s Generali controls 10% of the German life market after its purchase of the AMB group, AXA is Germany’s fifth largest insurer and Switzerland’s Zurich controls the Agrippina insurance group.
Conversely, German life insurers are increasingly viewing Europe as their market and selling their domestic holdings to fund acquisitions overseas. Allianz, for example, generates only 35% of its premium volume in Germany.
The 80m German population is also becoming increasingly worried about the sustainability of state-provided retirement and health benefits, which is already being reduced in a bid to cut a reported DM13.5bn (E6.9bn) deficit in the state PAYG system.
The prospect of this transfer to the private sector is contributing to the attractions of the German market. For example, a full switch of pensions to self provision could lead to contributions of e100bn–200bn for life insurers, banks and mutual funds.
The larger European players following Allianz are tending to make the most of these opportunities and are pulling ahead of their smaller rivals, largely through merger and acquisition activity.
So far this year, AXA Colonia has acquired Albingia as part of AXA’s buy-out of UK group Guardian, and the HUK-Coburg and HDI groups have commenced formal merger talks.
And with bancassurance generating 60% of all new premiums, substantial links with banks along the lines of those already in place between Allianz and Dresdner Bank and Ergo with Vereinsbank and Dresdner, will be critical to business development.