8 March 2023

Europe's life giants trip the lite switch firmly 'on'

Thomas Buberl, and Oliver Bäte are men with a mission, to preach the gospel of low-capital product. But will their customers buy it? David Walker asks

Thomas Buberl's most famous professional 'pivot' has been shifting AXA away from financial market risk – the stuff of life underwriting – and towards 'technical' risk – the key threat taken on in general underwriting.

But underneath the chief executive's top-line pivot, commenced in earnest when AXA bought XL Group in 2018, many related sub-pivots are underway.

In a life business, subjecting oneself less to the vagaries and volatilities of general account investments means, in part, pivoting from traditional guaranteed products to 'capital-lite', or capital-free unit-linked offerings.

Buberl is certainly doing all of that. Last year net outflows from AXA's 'traditional GA' life policies hit €7.4bn, while 'capital-lite GA' and unit-linked received €2.8bn of net subscriptions.

Yes, a 'no-repeat' of big group contracts in France from 2022 sent gross revenues from the new-era products down by about 12%, year on year. But the €13.5bn revenues AXA still got from what remained was significantly more than €2bn from 'traditional GA', whose gross revenues had fallen by 16%.

The double-digit fall in cap-lite revenues was something Buberl could clearly live with, not least if 'cap-heavy' revenues fell further, "in line with strategy".

His enthusiasm for capital-lite is clearly shared by AXA's rivals, including its biggest in Europe, Allianz. How so?

The clue, for both groups, really, lies in AXA's definition of 'capital lite' – "general account savings products which, at inception, create more eligible own funds than the economic capital they consume".

Alban de Mailly Nesle, AXA's chief financial officer (CFO), explained at its latest results: "We like lines of business that are not very capital hungry, with strong cash generation. We sell products that are light in capital, and generate...solvency [capital]. And what have we done with that solvency generation? Via dividends and buybacks, we gave a good chunk of it to our shareholders."

Neither Bäte nor Buberl seem satisfied that selling or reinsuring enormous life backbooks, and selling more low-capital policies, is 'doing enough' – perhaps reflecting unrelenting pressure from analysts.

At Allianz's full-year's earlier in February this year, Bäte flagged further actions to reduce the capital burden from its life operations. 'De-emphasise traditional stuff, reinsure or offload the capital burden, and go-lite,' might fairly sum up Allianz's capital ambitions.

Allianz already reduced the average promise to life and health policyholders from 1.76% in 2021 to 1.65% last year, and did it even after the department was achieving a net generation, not absorption, of Solvency II capital. Yet there is no deceleration in Bäte's capital-efficiency drives, in fact quite the opposite, he says. Investors "hate" the volatility inherent in financial risk of life business, he said at full-year's.

When it comes to scything into life capital burdens, Bäte and Buberl are truly 'men on missions'.

At the dawn of Solvency II

It all seems like aeons since Solvency II dawned in 2016, when analysts took a comparatively blunt view on insurers' regulatory capital.

Why, they asked a large Dutch group in 2017, was the first-year solvency ratio in its solvency and financial condition report different to its rivals'? "Well, it's not 'apples with apples'," was the CEO's fairly general, but correct, reply at the time.

Now, analysts pore over all the moving parts 'beneath' insurers' ratios, then chase CEOs like Buberl and Allianz's Oliver Bäte, about how to 'free up' more capital, by consuming less and using what is there more efficiently, to presumably pay shareholders what's surplus to need.

It can seem a CEO without a buy-back plan these days is a CEO on borrowed time.

In 2022/2023 Buberl has announced buy-backs spending €2.6bn, or the equivalent of nearly 40% of the €6.7bn regulatory capital AXA generated last year.

In such an environment, an insurer wanting to 'keep well ahead of the game', as it gives up so much of what would otherwise be fresh Solvency II own funds, needs to contain, preferably shrink, how much capital the regulations demand it have.

In AXA's case that shrinkage was from €28.6bn to €27.2bn, during 2022, achieved in part through 'capital lite'.

Buberl's pivot to lower or even nil-guarantees, is producing the most miraculous good news for AXA.

In 2022, the difference between what AXA yielded from investments for life policies, and the average guarantee on those policies, was only just half as demanding for its new policies – largely the 'lite stuff' – as for its in-force business ('capital-heavier' business).

To put that in figures, existing policyholders in 2022 had been promised 1.3%, on average, meaning the 2.6% yield on AXA's life and savings (L&S) asset base to meet that promise left the group with 130 basis points' leeway. On its new L&S policies, by contrast, the average promise was just 0.1%, leaving AXA pocketing 250bps after earning the same 2.6% upon reinvesting into fixed income assets.

It is fair to expect, yields for life insurers will only go up, and promises that can fall further, will.

It must be noted that for AXA it was the crushing of promises on new contracts in 2022 that fattened up the investment spread.

In four major markets, the yield on investments for new business was actually worse than the yield for existing L&S policies – so, in other words, in France, Germany, Switzerland and Belgium fixed income markets were not (yet) the tailwind for new-product investment spreads.

But AXA's life actuaries, product designers and distributors shifted products in each country with vanishingly small average guarantees, compared to the in-force books' promises in the same jurisdictions.

In France, 0.5% applied to in-force in 2022, compared to 0% for new policies. In Germany, 2.5% for in-force was 10 times the 0.2% AXA promised on new contracts. In Belgium the drop was almost twice as sharp, from 1.9% (in-force) to only 0.1% (new). Swiss in-force policies offered 1.1%, new business just 0.2%.

And in Italy AXA made just half the promise on new business (0.4%) as its average 0.8% guarantee for in-force contracts – but in Italy investment yields helped widen the spread, too, by being 100bps more when backing fresh business (2.8%) than for in-force work (1.8%).

The resulting yield/promise spread, from 'in-force' to 'new', more than doubled in Italy (from 100bps to 240bps); almost tripled in Switzerland (40bps to 110bps) and more than tripled in Germany (60bps to 250bps).

'No surrender'

One might fairly question – which analysts at both AXA's and Allianz's recent presentations did – if policyholders were tiring of all this, getting skittish or fed-up by seeing better potential returns available elsewhere as rates rise, and returning their policies? 'Two birds in the bush' might seem a better prospect to some investors eyeing off pure investment products, than the 'bird in the hand' of a life policy's meagre guarantee.

The answer from both insurers was 'no', or 'not materially', at least.

Frédéric de Courtois, AXA's deputy CEO, says: "Our [life and savings] surrender rate is stable, we have not seen any major changes in policyholder behaviour - which is good."

At Allianz, chief financial officer Giulio Terzariol had fairly echoed this sentiment at full-year's: "When we look at the major life portfolios such as Germany or the US, we see no acceleration in surrenders, and we did a lot of analysis and are very comfortable this is not an issue for us."

But market yields may yet rise further - while many policy promises could not deteriorate much further – and here, a phrase beloved of journalists worldwide might best be employed: 'watch this space'.

Lifers and their stock analysts clearly see the value, to them, of tripping the lite fantastic. But over time, if their life customers do not share their enthusiasm, they may yet turn the switch of lite life product sales, to 'off'.