Life European Actuarial Directors Forum

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Jesse Lane
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2 OUTLINE Outline Life sector restructuring Market overview: Opportunities and challenges in the European life sector M&A activity: Recent transactions and drivers Regional focus Northern Europe liability management and operational efficiency Southern Europe balance sheet issues Emerging Europe - growth 2013 and beyond

4 OVERVIEW Drivers of change Interest rate environment Historically low interest rates in Northern Europe Sovereign risk driving higher rates in Southern Europe Interest rates decreased in Emerging Europe Regulation Uncertainty around form and timing of Solvency II future capital position is unclear Increasing emphasis on value for money for the policyholder and transparency Cost reduction Product simplification Capital optimisation Strategic restructuring Growth outlook Low/ negative GDP growth in Northern and Southern Europe Stronger growth in Emerging Europe Low insurance penetration in Emerging vs. mature markets in Northern and Southern Europe Capital shortage Companies short of capital after investment losses in financial crisis Solvency II could increase capital requirements Other factors include; Product substitution, aging population, erosion of fiscal advantage

5 OVERVIEW In-force management as part of wider options for capital management Areas of Capital Management Financial/ actuarial Business management Investment Reinsurance Capital solutions Business reorganisation Review models for prudence Product redesign/ repricing Asset portfolio redesign/ restructure Reinsurance optimisation Equity raising Discontinue/ run-off certain lines of business Review actuarial reserves/dac for prudence In-force management Cash flow/ duration matching Internal reinsurance Debt structuring Reorganisation of corporate legal structures Accounting and tax optimisation Ongoing business volume/ mix management Derivatives/static/ dynamic hedging Risk transfer/ external reinsurance Contingent capital Redomiciling/ branch structures Regulatory arbitrage Underwriting and claims management Credit Financial reinsurance Sidecars or equivalent Internal captives/ resources Inter-group arrangements Expense management and outsourcing Alternative investments Securitisation Other (nonreinsurance) internal transactions Purchase/sale of business/blocks of business Possible Capital Management Actions Increasing Time Costs Complexity

6 OVERVIEW Price to EV has declined significantly since European Life Insurance Price/Embedded Value European Insurers P/EV /01/ /01/ /01/ /01/ /01/ /01/2013

M&A ACTIVITY European Insurance Deal drivers Capital shortage Economic crisis S2 and capital pressure Asset disposal Run-offs; downsizing; de-risking; combined books IPOs Examples: Groupama;

8 M&A ACTIVITY European Insurance Deal drivers Capital shortage Economic crisis S2 and capital pressure Asset disposal Run-offs; downsizing; de-risking; combined books IPOs Examples: Groupama; BBVA/SCOR Bank disposals Insurer retrenchment to core Opportunists; PE Realisation of geographic diversification Examples: ING; KBC; Aviva CEE/US Strategic restructuring Deal drivers Mature market decline In-market consolidation Economies of scale Capital synergies Examples: ILA/Great-West; German public insurers Still a story Share price premium Selected markets Examples: Warta; Finans Growth

9 M&A ACTIVITY European Insurance Deal drivers by region Capital shortage Mature market decline Growth Strategic restructuring Northern Southern Emerging 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. 9

10 M&A ACTIVITY Large deal snapshot Acquirer Acquired Entity Date Transaction ( million) Vienna Insurance Group Erste Bank insurance operations 26/03/2008 1,400 BNP Paribas AG Insurance (ex-fortis Insurance Belgium) (25% Stake) 06/10/2008 1,400 Generali Alleanza Assicurazioni (49.6% Stake) 23/02/2009 1,800 PartnerRe Paris Re Holdings 06/07/2009 1,200 Resolution Friends Provident 11/08/2009 2,200 MetLife American Life Insurance Company (ALICO) 28/03/ ,600 Resolution AXA (UK life and pensions businesses) 24/06/2010 3,300 Skandia Liv Skandia Nordics (excl-finland) 15/12/2011 2,500 Great-West Lifeco Irish Life 19/02/2013 1,300 * Does not include IPOs Source: Bloomberg, Mergermarket, company press announcements.

11 M&A ACTIVITY Number of completed transactions in the EMEA life sector: Note: Graph shows completed deals only, multiline transactions are excluded

12 M&A ACTIVITY Europe transactions Skandia Liv - Skandia Nordics ( 2.5 bn) Generali - PPF ( 1.3 bn) Aviva CEE non-core disposal Great-West - Irish Life ( 1.3 bn) Non-core disposals (Aviva, Generali) Warta TU Europa Resolution - AXA UK Life ( 3.3 bn) Bancassurance Capital distress Bancassurance Securitisations (Santander, Caixabank, BBVA) Bancassurance (Finans, Deniz) Note: Multiline transactions only included where a substantial part of the deal is life business

13 M&A ACTIVITY What will it take for deals to happen? Management bandwidth Consolidation vehicles Price differentials Pull push pipeline

15 NORTHERN EUROPE UK market development % insurance premium that was with-profit m 20,000 20% 3% 6% 18,000 16,000 14,000 12,000 10,000 8,000 Retail collective investments Retirement income Group personal pensions Individual personal pensions Protection Bonds Savings 6,000 4,000 2,

16 NORTHERN EUROPE How have UK insurers reacted? Focus on investment fund management Low capital requirements Low margin Scale is key Emergence of platforms Administration services Aggregation of funds Focus new business on growing segments Protection At retirement Corporate pensions Niche (Bulk Purchase annuities, enhanced annuities, income protection) Expanding outside the UK Structural growth in Asian and other developing insurance markets Closure and consolidation of back books All companies more focussed on returning cash to shareholders in ex-growth market

NORTHERN EUROPE UK consolidation Activity has been limited; Limited capital / returning capital to investors Focus on internal restructuring of previous acquisitions

17 NORTHERN EUROPE UK consolidation Activity has been limited; Limited capital / returning capital to investors Focus on internal restructuring of previous acquisitions Uncertainty around Solvency II Limited management capacity Example strategy from Resolution/ Friends Life Source: Resolution/Friends Life presentation 9 November 2011

18 NORTHERN EUROPE With-profits funds the issues Contracting market Reducing new business sales Funds considering closure / run-off Consolidation for closed funds Actuaries that understand the intricacies of with-profits Risk exposures have changed Guarantees many heavily in the money Investment environment low returns and high volatility Pressure on capital to support business Governance / costs Increased FSA requirements over recent years PRA/FCA to come Management of with-profits business disproportionate Legacy assets under scrutiny head office, non-profit business Diseconomies of scale

19 NORTHERN EUROPE Restructuring with-profits funds proprietary companies Option Description Policyholder benefit Shareholder benefit Internal consolidation Transfer legacy funds into one company Rationalise financial management and systems Lower running costs Reduces costs More efficient use of shareholder capital support Conversion to unitlinked or non-profit Removes guarantees Releases capital Existing legal process Requires a policyholder vote Immediate uplift in value Fairer distribution of fund surplus Simpler and more transparent products Immediate capital release Simplification and cost reduction Mitigates with-profit governance issues

20 NORTHERN EUROPE Restructuring with-profits funds mutuals The issue Decline in with-profits Increased sales of non-profit business ties up members capital Should mutuals close and distribute capital to WP policyholders? Pressure from regulator to resolve ownership of capital issues Identify members mutual funds Identify Mutual Capital to fund the on-going (non-profit) business The balance of capital is available to distribute to WP policyholders Resolves the issue of ownership of capital Draft regulation to govern the process of establishing mutual capital Mutual can remain as an on-going entity selling non-profit business WP business NP business WP business NP business Surplus capital WP Surplus Members Mutual Funds

21 NORTHERN EUROPE Evolution of the German market Regulated market pre 94 Traditional German Model De-Regulation (Pure) Unit- Linked Niche Players Traditional German Model The future? Integrated Financial Services Niche Players Run-off Specialists Traditional German Model We see similar dynamics in other Northern European markets

22 NORTHERN EUROPE Analysis of the German life market Return on capital and financial strength under Solvency II

23 NORTHERN EUROPE Development of the Dutch life market Life Premium Income The perfect storm? Financial distress Policyholder compensation End of commission payments to distributors Loss of tax advantages

24 NORTHERN EUROPE Addressing the decline in individual business The issue Companies are practically in run-off No companies are officially closed to new business Declining business leads to expense issues Capital requirements are high on traditional business What companies need to do Expense control/downsizing companies are acting on this now Consolidation of funds to spread costs across more policies Removing costly guarantees would benefit the capital position Focus on group business and niche growth areas Obstacles Lack of certainty around legacy issues No legal process for removing guarantees from products Regulator is not pushing the market to a conclusion Policyholders do not trust the industry

26 SOUTHERN EUROPE Market background - Significant premium declines recently million Life Life Premiums -12,6% -18,0% -5,9% -9,0% -39,1% France Italy Spain Portugal e Source: Insurance companies associations and local regulators

27 SOUTHERN EUROPE Market background Negative/zero GDP growth and financial crisis Difficult environment for attracting voluntary savings contributions Lack of capital Regulatory Large unrealised losses on government bonds have been sterilized by local Solvency I measures Matching adjustment outcome is critical in Solvency II Pre-application processes for internal models are very slow Product trends Sharp reduction in guarantees with some notable exceptions based on government bond spreads Increased competition from banks inclined to market own products Drop in loan linked protection partly offset by increase in stand-alone protection

28 SOUTHERN EUROPE Case study Spanish bancassurance consolidation 60 Number of banks/cajas groups in Spain

29 SOUTHERN EUROPE Case study Spanish bancassurance consolidation Banking sector situation Banking groups Activity/Strategy Banks Very solvent: 11 groups with assets of 1.6 trillion have significantly more than the required capital under stressed conditions Solvent: 4 groups with assets of 0.4 trillion have zero or small capital deficits under stressed conditions and are expected to close the gap Insolvent: 4 groups with assets of 0.5 trillion have large capital deficits under stressed conditions Buying distressed banks. Improving capital position further e.g. insurance VIF securitisation Expected to remain alone. Improving capital position e.g. issuing new equity; securitising insurance VIF; selling industrial assets Need (or already have had) an injection of public money, large reductions in structure. Expected to be integrated into other groups in the coming months CaixaBank, BBVA, Santander, Sabadell Popular, Ibercaja/Caja3, Liberbank, Unicaja/Ceiss Bankia, Catalunya, NCG, BMN

30 SOUTHERN EUROPE Case study Spanish bancassurance consolidation Life bancassurance situation Banking groups Activity/Strategy 7 banking groups with assets of 1.2 trillion euros, of very solvent or solvent banks All other banking groups Major trends 100% owned bancassurance provider Integration of insurance business bought from distressed banks Insurance VIF securitisation to raise capital Santander has recently entered a 50/50 JV for new business 50/50 JVs with traditional insurers e.g. Mapfre, Zurich, AEGON, Aviva, Caser, Allianz, CNP, Generali Current restructuring of insurance JV deals, towards one single partner. Partner for the insolvent groups will depend on eventual buyer Caixabank, BBVA, Santander, Ibercaja, Kutxabank, March, Laboral Sabadell, Popular, Unicaja

31 SOUTHERN EUROPE Case study Spanish bancassurance securitisations Banks that own 100% of bancassurers are raising capital through the securitisation of their in-force protection business Why securitisation of in-force protection? Desire to retain own insurance brand and contact with customers Difficulty to sell the business as a whole due to wide price gaps for savings portfolios and uncertainty of future new business Speed and tax advantages versus partial business transfers

32 SOUTHERN EUROPE Spanish bancassurance securitisations Recent deals Acquirer/reinsurer Acquired business/cedant Date Payment ( million) Abbey Life Santander s in-force individual life protection July Berkshire Hathaway CaixaBank s in-force individual life protection November SCOR BBVA s in-force individual life protection March Source: Company press announcements.

33 SOUTHERN EUROPE Spanish bancassurance securitisations Structure of the Santander deal Loan to finance the upfront commission Reinsurer (Abbey Life) Loan repayments Q/S 100% reinsurance on the in-force individual life protection business Reinsurer pays a price based on the VIF, as an upfront reinsurance commission Insurer pays regularly the profits to the reinsurer Insurer (Santander Seguros) Investment Bank (Deutsche Bank)

35 EMERGING EUROPE Insurance market development Life insurance premium as % GDP (2011) 14% 12% 10% 8% 6% 4% 2% 0% Insurance premium as % GDP GDP per Capita Thousands GDP per capita (EUR) 2011 Northern Europe Southern Europe Emerging Europe Insurance penetration in Emerging Europe well below Northern and Southern Europe More potential for economic growth in Emerging Europe Ageing population and reduction in social provision will contribute to insurance growth

36 EMERGING EUROPE Interest rates in Emerging Europe (2009 Present) Turkey Russia Romania Poland Slovakia Czech Republic 0

37 EMERGING EUROPE Market environment Product Traditional life / low nominal rates Pensions long tail spread dependent Protection diversification Distribution Economics under pressure Diversify channels Scale Growth Share price premium Under-penetration Scale markets A changing market Regulation Public policy Political risk / stability key Capital / upstreaming Pricing / conduct of business

38 EMERGING EUROPE Getting deals done Drivers Inhibitors Drivers Inhibitors Growth story especially where scale Low scale in many markets Forced exits Political and regulatory risk Strategic disposals of non-core Sovereign risk local vs. global Strong valuations Trapped capital Acquisitions earnings dilutive Little appetite for risk transfer or other forms of economic participation Margin squeeze Diverse and credible buyers for scale markets (US, Europe, Japan) In-market or regional buyers Not many investors with significant excess capital

39 EMERGING EUROPE Structural reorganisation and risk transfer Restructuring Limited appetite for restructuring solutions Monetisation Bank-owners (and conglomerates) monetising through traditional sale processes Disposals Scale considerations Reluctant to exit for capital reasons

41 2013 AND BEYOND The European life sector needs change Developments required

Securitisations for Life Insurers

Securitisations for Life Insurers Overview and opportunities Wolfgang Hoffmann 22. October 2013 Agenda Introduction VIF Monetisation / Securitisation Structuring of transactions Key Impact impacts on KPIs