French Life Insurance
www.moodys.com
Moody’s
Insurance
Industry Outlook October 2007
French Life Insurance
Table of Contents: Summary Opinion
1
Market Overview
3
Distribution
7
Product Risk
8
Profitability
11
Reserve Adequacy
13
Asset Quality and Asset Liability Management
14
Stable outlook reflects potential for further, though slower, growth and sustained new business margins; challenges include increased litigation risk and adapting the capital structure to Solvency II requirements Summary Opinion
Analyst Contacts: London
44.20.7772.5454
0 Benjamin Serra Associate Analyst
0 Timour Boudkeev Vice President -Senior Credit Officer Simon Harris Team Managing Director
The French life insurance market has experienced solid growth since 2004, and a further acceleration in 2006 thanks to a confluence of favourable but non-recurring factors. Moody’s therefore anticipates a slowdown in growth for the French market in the short term, which should in particular affect those life insurers that are subsidiaries of banks, which benefited the most from growth in 2006. However, we consider that the market has not yet reached maturity, as life insurance represents a constantly rising share of savings by French households, thanks in particular to the growing role of distribution channels such as banks and, more recently, independent financial advisors, which sell both banking and insurance products. Moody’s believes that the overall liability risk of French life companies has been decreasing in recent years. The new traditional savings products tend to have low guarantees and the stock of policies with high guarantees is decreasing. In addition, unit-linked products account for a growing proportion of life insurance sales and liabilities. We note that most companies are now focusing their marketing efforts on these products as they tend to have more attractive margins – although a significant increase in interest rates could potentially make traditional products more attractive again.
Industry Outlook
Moody’s Insurance
French Life Insurance Furthermore, liabilities relating to annuities remain low and longevity risk is well contained as a result of prudent reserving. We do not anticipate rapid growth in pension business in the short term. In Moody’s view, group pension business is likely to develop first, driven by employee savings schemes, followed by individual pension business as the substitution rate of state pensions is set to decrease. Another possible development is the combination of retirement and long-term care products to offer comprehensive retirement solutions to the ageing population. Nonetheless, the success of unit-linked products and the recently tightened regulation around the provision of information to policyholders increase the exposure of life insurers to legal risk, as evidenced by recent cases in which companies were forced by courts to reimburse losses suffered by policyholders. The French life insurance market is also experiencing intensifying competition. Low-cost players and policyholder associations have recently exerted pressure on fees, which may reduce the profitability of life insurers going forward. In the medium term, Moody’s considers that one of the main challenges for the French life insurers will be to anticipate policyholder behaviour patterns, which have been very stable so far. However, we believe that financial fundamentals are sound in the French market, with prudent reserving practices and low asset risk. Capitalisation is good, although partly reliant on subordinated debt, particularly in the case of companies experiencing rapid growth. Future sales of French life insurance products will also be heavily dependent on tax incentives. Any adverse change in tax advantages for insurance products – such as the recent modification of the inheritance tax regime – could have a negative impact on market growth.
Credit Strengths !
Diversity of players and distribution channels leading to product innovation
!
Comparatively low risks on the liability side of the balance sheet thanks to a historical focus on unit-linked products as well as a less risky traditional savings business (declining guaranteed rates)
!
Sound financial fundamentals with prudent reserving and low asset risk
Credit Challenges
2
!
Limiting the legal risk in a context of tighter regulation of policyholder disclosure and an increasingly litigious environment in France
!
Capitalising on growth opportunities, especially in the retirement business, and anticipating changes in policyholder behaviour in the context of ageing population and rising interest rates
!
Maintaining recent good levels of profitability in the context of growing competition and pressure on fees
!
Capitalisation partly reliant on subordinated debt and policyholder capital
!
In the long term, adapting financial policies, risk management processes and capitalisation to the requirements of Solvency II
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance
Market Overview A growing market that has not yet reached maturity, despite comparatively high penetration Figure 1: Life Gross Premiums Written by Country - 2005
Figure 2: Life Insurance Penetration Rate by Country - 2005 10.0%
160 EUR billion
8.0% 120
6.0%
80
4.0%
40
2.0%
0
So urce: CEA
d i te Un
m ce n do ng Fra Ki
0.0%
s d y m a in nd en an nd iu an m erl a el g Sp erl a wed Finl er B S i tz G eth w N S e Th
Ita
ly
Source: CEA
s d y y n e e m om ai nd Ital d en rag l and nc l an giu an gd l a n e Sp rm erl a e er Fi Be Ki n Fr e Sw p Av i tz G eth d u N Sw i te ro e Un G Th
France is the second-largest European life insurance market, and the fourth-largest globally. The life insurance penetration rate in France is also one of the highest in Europe. The French life insurance industry recorded sustainable growth in recent years, with an 11% CAGR of gross premiums written and a 13% CAGR of net inflows in the last five years. Figure 3: Life Insurance Growth
Figure 4: Growth of Mathematical Provisions
160
70 65
120
50 45 40
100 80
35 30
60
1100 1000 EUR billion
60 55
Net Inflows - EUR billion
GPW - EUR billion
140
25 20
40 2001
2002
2003
2004
2005
900 800 700 600 500
2006
2001 GPW
Source: FFSA
Net Inflow s
2002
2003
Source: FFSA
160
45
140
40
120
35 30
100
25
80
20
60
15
40
10
20
5
0
0 2001
2002 Total
3
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
2003 Other Contracts
2004
2005
2006
Unit-Linked Contracts
Unit-Linked Contracts - EUR billion
Total and Other Contracts - EUR billion
Figure 5: Gross Premiums Written
2004
2005
2006
Industry Outlook
Moody’s Insurance
French Life Insurance Part of the growth was related to cyclical events: !
a favourable financial markets environment has increased sales of unit-linked contracts
!
following the reduction in tax benefits for some banking products , assets have been transferred from banks to insurance companies
!
some companies accounted for the conversion of traditional savings contracts into unit-linked contracts
1
2
operated according to the “Fourgous amendment” as revenues !
to a lesser extent, growth in home loans has translated into increased credit insurance premiums.
Therefore, we anticipate a slowdown in insurance premiums growth in the short term. This should particularly affect subsidiaries of banks, which were the main beneficiaries of transfers from banking products and the growth in credit insurance. However, Moody’s believes that the French life insurance sector has not yet reached maturity, and we see some growth potential, both in savings and in retirement products. Insurance savings products have represented a growing share of French household savings for 20 years, thanks mainly to the following developments: !
tax advantages for insurance policyholders
!
the growing involvement of banks in the life insurance market
!
a decline in interest rates, which has made regulated banking products less attractive than insurance savings contracts
!
product innovation with a growing range of investment strategies available within insurance products, making them increasingly comparable and competitive with other financial products
The recent increase in interest rates could weaken the competitiveness of traditional savings products, but taxation policy remains advantageous for insurers, despite recent changes in the inheritance tax regime. We believe that future growth of life insurance will mainly be driven by product innovation. Figure 6: Breakdown of Savings of French Households 100% Liquidities
80% 60%
Shares and Bonds
40%
2005:36.3% 20%
1996:26.7%
Insurance
20 05
20 04
20 03
20 02
20 01
20 00
19 99
Source: CEA
19 98
19 97
19 96
0%
1 Since 2006, fiscal policy related to the PELs (Plan d’Epargne Logement, a regulated savings account) opened for more than 12 years has been less attractive, which led many customers to close these accounts and invest their funds in insurance contracts. 2 In 2005, the “Fourgous amendment” authorised the conversion of traditional savings contract into products combining unit-linked and traditional savings guarantees, without any tax penalties, whatever the age of the contract.
4
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance Life insurers will also enjoy growth opportunities in the pension business. Benefits paid by insurance companies, mutuals and provident associations represented only 3.4% of total retirement benefits in France in 3
2005 . A predictable decrease in the substitution rate of state pensions will translate into a growing demand for pension insurance products. 4
Furthermore, pension funds managed internally by certain employers have to be transferred to provident associations or insurance companies before the end of 2008, which presents another potential source of growth. In the medium term the French life insurance market may reach maturity, and companies will face growing outflows, as the number of retired persons will increase. However, part of the outflows could be converted into single-premium annuities. Figure 7: Age of Outstanding Life Insurance Contracts - 2004 more than 20 years, 12% 17 to 20 years, 5%
1 to 4 years, 29%
13 to 16 years, 12%
9 to 12 years, 21%
5 to 8 years, 21%
Source: INSEE
A more concentrated market than non-life, but amongst the most fragmented in Europe Figure 8: Number of French Life Insurance Companies 140 135 130 125 120 115 110 105
20 06
20 05
20 04
20 03
20 02
20 01
20 00
19 99
19 98
19 97
100
Source: ACAM
In line with what we have observed in the rest of Europe, the insurance sector in France has been undergoing consolidation for the past ten years, but this trend has now slowed down. In recent years, most mergers have occurred between companies in the same group, however co-operation agreements between companies have also become more common. At the end of 2005, two major mutual groups – MAAF-MMA and Azur-GMF – 5
merged to form Covea SGAM . Fewer companies operate in the life market than in non–life; nevertheless, the French life market is among the most fragmented in Europe.
3 Source: FFSA. 4 Known as IRS (Institutions de Retraite Supplémentaire). 5 Société de Groupement d’Assurances Mutuelles. See Special Comment “Sociétés de Groupes d’Assurances Mutuelles (SGAMs)”, April 2004 (81852) – French translation (81855).
5
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance Figure 9: Market Share of the five largest life insurance groups United Kingdom
1993
2004
30.4%
50.0%
France
47.0%
55.6%
Italy
49.4%
62.8%
Germany
30.9%
N/A
The Netherlands
55.7%
74.1%
Belgium
61.5%
73.5%
Spain
37.2%
41.5%
Switzerland
71.1%
78.8%
Sweden
72.5%
70.3%
Finland
95.0%
84.9%
Total EU
41.9%
57.9%
Source: CEA
A predominance of banking groups in the top league There has been no change in position among the top five players in recent years, but more movement has taken place among the top ten players. The most notable development was the increased market share of banking groups, with five banking groups now represented among the top eight players (Caisses d’Epargne as a member of the CNP Group, Crédit Agricole, BNP Paribas, Société Générale and ACM, which overtook AGF in 2005).
Figure 10: Market Shares of the Top 20 Groups and the Top 20 Operating Companies in the French Life Industry - 2005 GPW (EUR million)
Mkt Share
GPW (EUR million)
Mkt Share
CNP
21,489
17.2%
Prédica
17,821
14.2%
Crédit Agricole
17,825
14.2%
CNP Assurances
11,561
9.2%
Axa
12,156
9.7%
Axa France Vie
11,379
9.1%
Generali
9,191
7.3%
Cardif Assurances Vie
9,609
7.7%
BNP Paribas
9,021
7.2%
Ecureuil Vie
9,425
7.5%
Société Générale
7,728
6.2%
Sogécap
7,631
6.1%
ACM
5,850
4.7%
ACM Vie SA
4,992
4.0%
AGF - Allianz
5,177
4.1%
La Fédération Continentale
4,985
4.0%
Aviva
5,053
4.0%
AGF Vie
4,216
3.4%
Groupama
4,220
3.4%
La Mondiale partenaire
3,104
2.5%
La Mondiale
3,968
3.2%
Assurances Banque Populaire Vie
2,887
2.3%
Swiss Life
3,410
2.7%
Generali France Assurances Vie
2,697
2.2%
Covéa
3,099
2.5%
Suravenir
2,229
1.8%
Natexis-BP
2,953
2.4%
Aviva Vie
2,229
1.8%
GPW (EUR million)
Mkt Share
2,510
2.0%
Group
Group Arkéa
6
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Operating Company
Operating Company Mutavie
GPW (EUR million) 1,792
Mkt Share 1.4%
Industry Outlook
Moody’s Insurance
French Life Insurance MACIF
1,792
1.4%
Groupama Vie
1,759
1.4%
MACSF
1,018
0.8%
GPA Vie
1,375
1.1%
914
0.7%
Société d'Epargne Viagère
1,194
1.0%
Médéric ACMN
833
0.7%
La Mondiale
1,068
0.9%
Prépar
497
0.4%
Gan Assurances Vie
1,051
0.8%
Total Top-20
118,704
94.8%
Total Top-20
103,004
82.3%
Total (Direct)
125,182
100.0%
Total (Direct)
125,182
100.0%
Source: L'Argus de l'Assurance
Distribution Distribution is dominated by banks, but non-proprietary networks play an increasingly important role Banks dominate the life insurance distribution, having continually increased their market share for the past 20 years. In recent years, insurance subsidiaries of banks have benefited from a change in the taxation of banking products (see above) and the resulting transfers of funds to insurance products. The growth in home loans has also had a positive effect on credit insurance premiums. Banks have benefited from their well-developed retail networks. However, given that most sources of growth from these channels are non-recurring, Moody’s believes that the market share of life insurers owned by banks is unlikely to increase much further from current levels. Figure 11: Breakdow n of Gross Prem ium s Written by Distribution Channel - 2006
Salaried Sales Force 15%
Other 2%
Brokers 12% Banking Channels 64%
Tied Agents 7%
Source: FFSA
Total 2006: EUR155.2 billion
Furthermore, distribution through non-proprietary networks has developed more recently in the French market. 6
Financial advisors have the ability to offer a wide range of financial products to their customers, both assetbased and insurance products. This distribution channel now accounts for more than 10% of retail insurance premiums. In addition, rapid growth of this independent distribution channel has influenced the structure of insurance products, especially unit-linked. While traditional insurers and bank subsidiaries usually offer a limited range of funds (mainly those managed by the asset management subsidiary of the related group), financial advisors typically offer an extensive list of funds from different providers.
6 Known as “Conseillers en Gestion de Patrimoine Indépendants” (CGPI) in the 2005 Financial Security Act.
7
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance Underwriting associations have also played a major role in the distribution of life insurance products and have contributed to increased competition in the French market. These associations underwrite contracts on behalf of all members, and thanks to their size they have been able to negotiate fees. The largest such associations are: AFER (with Aviva), AMPHITEA (La Mondiale), AGIPI (Axa), ADIF (MMA) and Gaipare (AGF and Fortis Insurance). Mutuals without intermediaries are also keen to increase their market share in life insurance. However, their networks, historically trained to sell non-life insurance, sometimes lack expertise in life. Furthermore, their policyholders are on average more risk-averse and do not have an appetite for unit-linked contracts, which tends to reduce their growth potential as well as new business margins. In addition, life insurance products are increasingly sold through the internet. These products differentiate themselves by low entrance fees and therefore primarily compete with products sold by financial advisors to customers not keen on paying for advice. The success of this channel remains marginal for the time being but its market share might increase as competition in the French market focuses increasingly on fees. As far as group life insurance is concerned, brokers remain the predominant distribution channel, with a market share of around 40%.
Life insurance distribution is increasingly regulated During the last two years, new regulation of insurance distribution has been introduced. In particular, a new law on insurance intermediaries was enacted in 2006. This regulation has an impact on both intermediaries and insurers, as it sets out the information that insurers have to provide to policyholders. This issue is all the more important as French policyholders have the right to cancel their contracts (and to be refunded) for up to 30 days after receiving all the information. Some policyholders who purchased a unit-linked contract in 2000, when the stock markets were at their peak, attempted to exercise this option many years after the effective date of the contract, when the surrender value of the contract was significantly below the premium paid, on the basis that they had not at the time received all the required information. In most proceedings that came to court, insurance companies that challenged the good faith of these policyholders lost their cases.
7
The latest regulations should define the required information and avoid differences of interpretation that occurred in the past. However, at the same time, it is becoming increasingly costly for the companies to comply with the regulation.
Product Risk Figure 12: Breakdown of Technical Liabilities by Line of Business - 2005 Unit-Linked Contracts 20%
Individual Protection Contracts 0%
Figure 13: Breakdown of Gross Premiums Written by Line of Individual Business - 2005 Group Protection
Group Protection Contracts 1%
Group Traditional Savings and Retirement Contracts 7%
Unit-Linked Contracts 23%
Individual Traditional Savings and Retirement Contracts 72% Total Technical Liabilities: EUR965.6 billion
Source: ACAM
Group Traditional Savings and Retirement Contracts 4% Source: ACAM
7 For example, the French Court of Appeal (Cour de Cassation) ruled against La Mondiale and Axa in March 2006.
8
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Protection Contracts 1%
Contracts 4%
PERPs 1%
Individual Traditional Savings and Retirement Contracts 67%
Total Gross Premiums Written: EUR120.2 billion
Industry Outlook
Moody’s Insurance
French Life Insurance Savings business tends to be less risky for insurers thanks to a growing share of unit-linked contracts in the life business… In France, retail traditional savings contracts prevail in both reserves and new business. However, unit-linked products represent a meaningful share of life business and are becoming increasingly important. Figure 14: Share of Unit-Linked Contracts in Life Insurance 30% 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 2001
2002
2003
2004
2005
2006
Share of UL contracts in Technical Liabilities Source: ACAM
Share of UL contracts in Gross Premiums Written
Since 2002, liabilities related to unit-linked products have grown due to appreciation of equities; new unitlinked business also experienced rapid growth in this environment. Nevertheless, the current levels have only reached levels witnessed in 2001, just before the financial market downturn, and are still below the levels of 2000. However, Moody’s believes that the proportion of unit-linked products in total liabilities is likely to increase in the future, for the following reasons: !
insurance companies strongly promote unit-linked products due to their higher margins and lower risk
!
thanks to the “Fourgous amendment” (see above), many traditional savings contracts have been transformed into products including a compulsory minimal share of unit-linked guarantees
!
the growing involvement of independent financial advisors in life insurance distribution has attracted policyholders that are less risk-averse
!
guarantees on traditional savings policies are less attractive than in the past, offering a less obvious tradeoff to policyholders than in 2001.
Furthermore, as Solvency II is likely to penalise investments in equities for traditional products, this may further encourage sales of unit-linked contracts. If the increased share of unit-linked contracts is maintained, this would be a credit positive for French life insurance companies because of higher margins and lower capital requirements associated with them. However, even though the financial risk is theoretically transferred to the policyholder in such contracts, Moody’s notes that litigation risk remains high in France. A number of legal cases have appeared in recent years, illustrating the risks related to unit-linked products:
9
!
The risk related to the renunciation right by a policyholder (see above). Some companies have been ordered by courts to reimburse their policyholders in cases where the surrender value of the contracts was below the premiums paid, because of insufficient information, or simply because the format in which the information was provided was incorrect.
!
The reputation risk in cases of misselling (e.g. between 1999 and 2000, CNP sold unit-linked contracts through the Post Office network, and some policyholders were not aware that they had no capital guarantee; when they realised that their investment had lost in value, some of them sued La Poste;
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance 8
although the Post Office did not have to make any payments , it may have led to a loss of trust in this distribution network). Litigation risk was largely contained so far because class actions are not allowed in French legislation. However, the French government is planning to permit collective claims in order to enhance consumer protection.
…and a less risky traditional savings business Figure 15: Average Return of Traditional Savings Contracts 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 1997
1998
1999
2000
2001
2002
2003
2004
2005
Average Reurn = interests attributed to policyholders / average mathematical provisions
Source: ACAM
Despite the continuing predominance of traditional savings products in the liabilities of French life insurers, Moody’s considers that the average liability risk is decreasing. Indeed, companies used to sell contracts that offered high guarantees for a long period of time, whereas most new products now offer a 0% guarantee, or a higher guaranteed return but for one year only. French companies still have liabilities related to old contracts, but the average guarantee decreases rapidly as older contracts (bearing the highest guarantees) mature and also because many companies amended contracts to lower the level of guarantees. Such changes have sometimes been easier to implement as many French contracts are underwritten on a group basis by an association (in this case, the insurance company only needs the agreement of the association to amend the contract and it only has to inform the ultimate policyholders). However, we note that a new legal risk arose in the French market following these practices, as the regulator recently denounced such amendments because it considered that the associations were in some cases not 9
independent from the insurance companies. Nonetheless, we believe this risk is low, as in most cases the reduction in guarantees has been coupled with rebates (e.g. decrease in entrance fees for supplementary premiums or decrease in management fees). No major legal action has been initiated so far because of these amendments. Furthermore, a decree published in 2006 now clarifies the operating rules for these associations.
8 Although CNP was sanctioned by the Insurance Supervisory Authority. 9 In December 2004, the French Insurance Supervisory Authority sanctioned Predica because it amended one contract underwritten by the association Andecam (lowering the guaranteed return from 4.50% to 0.30%) and the regulator considered that the company was exposed to a legal risk that was not taken into account in the company’s reserves. This sanction was confirmed in March 2007 by the Conseil d’Etat.
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October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance Penetration of retirement products remains low, but these products should enjoy steady growth In France, 97% of retirement benefits are paid by the State, and insurance companies mainly sell group retirement contracts (purchased by employers for employees). They also offer retirement products aimed at non-salaried workers (“Contrats Madelin”). In 2003, the PERP (Plan d’Epargne Retraite Populaire), a new retirement product, was launched in the French market. This product has developed very slowly so far, despite its tax advantages, reflecting French policyholders’ limited appetite for annuities. Nonetheless, Moody’s believes that annuities will enjoy steady growth, as the substitution rate of state pensions is set to decrease. We also expect to witness an increase in pension insurance being offered as one element of a wider solution for an ageing population that combines both retirement and long-term care guarantees. Growth in retirement products is also likely, in our view, to be driven by group retirement covers, coupled with employee savings schemes – a trend that has already been observed in recent months. According to our estimates, immediate annuities represent around 10% of technical liabilities in the French market, and this percentage should remain stable in the short term. However, as retirement products develop further, the proportion of deferred annuities should increase. Notwithstanding this growth, we believe that longevity risk is well managed in France owing to prudent reserving rules (see below).
Protection contracts will remain a small part of the life insurance business Protection contracts represent around 5% of both life gross premiums written and life technical reserves. The vast majority are group contracts, combined with retirement guarantees, purchased by employers for their employees. Growth in mortgage loans has also recently been a factor driving the increased demand for credit insurance. In the coming years, insurers could increase sales of protection insurance as they develop their health and long-term care insurance business.
Profitability The industry has achieved technical profits through the cycle Technical results of the French life industry are largely driven by its financial results. Although profitability came under pressure during the period of declining interest rates, insurers managed to achieve sufficiently strong financial results (under French GAAP) to provide guaranteed returns on traditional savings contracts, thanks in particular to a stock of old high-coupon bonds. As these bonds mature, financial results may decline, but so will the average guarantees. Since most of the financial income is shared with policyholders in France, another major driver of technical results is the level of fees, particularly resulting from the unit-linked business. We note however that the growing share of liabilities related to unit-linked policies will further increase the correlation between underwriting results and the performance of equity markets. Acquisition and administrative costs have increased more slowly than gross premiums written and technical liabilities, and we believe many companies still have scope to further reduce their costs. However, distribution through independent financial advisors may increase acquisition costs.
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October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance Figure 16: Components of Net Technical Result (as a % of average liabilities) 2001
2002
2003
2004
2005
2006
Underwriting Result
0.8%
0.7%
1.0%
0.8%
0.9%
N/A
Financial Result (net of profit sharing)
0.5%
0.5%
0.3%
0.5%
0.4%
N/A
Acquisition and Administrative costs
1.0%
1.0%
1.0%
0.9%
0.9%
N/A
Reinsurance Result
0.1%
0.0%
0.1%
0.0%
0.1%
N/A
Net technical Result
0.4%
0.2%
0.4%
0.4%
0.4%
0.5%
Source: ACAM / FFSA
Figure 17: Components of Net Technical Result (as a % of GPW) 2001
2002
2003
2004
2005
2006
Underwriting Result
6.7%
5.7%
8.5%
6.5%
6.5%
N/A
Financial Result (net of profit sharing)
4.1%
4.0%
2.5%
3.7%
3.1%
N/A
Acquisition and Administrative costs
8.2%
8.4%
8.0%
7.4%
7.0%
N/A
Reinsurance Result
0.5%
0.2%
0.6%
0.3%
0.5%
N/A
Net technical Result
3.0%
1.5%
3.6%
3.0%
3.1%
3.3%
2005
2006
Figure 18: Return on Equity 2001 Return on Equity
11.1%
2002 4.3%
2003 10.4%
2004 9.8%
10.7%
12.1%
Equity
Net Result / Equity
Source: FFSA
Figure 19: Profitability of the Top 20 Groups - 2005 Group
Net Result
Equity
Group
Net Result
CNP
805
9511.0
8.5%
La Mondiale
54
1444.0
3.7%
Crédit Agricole
477
6875.0
6.9%
Swiss Life
46
1325.0
3.5%
Axa
547
3624.0
15.1%
Covéa
73
2437.0
3.0%
Generali
173
1321.0
13.1%
Natexis-BP
87
1011.0
8.6%
BNP Paribas
302
2614.0
11.6%
Arkéa
54
695.0
7.8%
Société Générale
112
2167.0
5.2%
MACIF
-51
457.0
-11.2%
ACM
211
2393.0
8.8%
MACSF
70
1094.0
6.4%
AGF - Allianz
417
2912.0
14.3%
Médéric
27
601.0
4.5%
Aviva
225
1970.0
11.4%
ACMN
23
223.0
10.3%
Groupama
141
2066.0
6.8%
Prépar
11
131.0
8.4%
Source: L'Argus de l'Assurance
12
Net Result / Equity
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance
Reserve Adequacy Life reserves are calculated according to prudent regulatory rules French life insurers have to comply with prudential rules for the calculation of their mathematical reserves, using prudent discount rates (60% of the risk-free rate for long-term contracts) and prescribed mortality tables. Mortality tables were updated in 2006 to take into account increased life expectancy. In addition, mortality tables that apply to the calculation of annuities reserves have been updated using statistics based on a population with an annuity contract. Consequently, this new table also takes into account the effect of adverse selection usually observed in pension insurance. For most insurers, the change in mortality tables will translate into an increase in mathematical reserves, which can be spread over 15 years.
Insurers factor in embedded options into their pricing In the past, French life insurance contracts used to include options that were neither priced for nor taken into account in reserving. This issue was raised in 2001 when the guaranteed minimum death benefit options embedded in some unit-linked policies went in the money after the downturn in stock markets. Most insurers now take these options into account in their reserve calculation. Nonetheless, in 2004 the regulator sanctioned Predica over inadequacy of reserves related to the guaranteed minimum death benefit option. However, Moody’s believes that the risk related to this specific option is low for the French industry. Many companies have also offered savings contracts with an option to convert the capital at maturity into an annuity benefit. For some companies, the conversion rates (discount rate and mortality table) are fixed at the underwriting date, which exposes these companies to a decline in the interest rate or to a change in the regulatory mortality table. However, the annuities conversion option has been rarely exercised historically and the low appetite of French policyholders for annuities should limit the risk in the short term.
Provisions for bonuses are being accumulated Having used their bonus pools to maintain attractive returns on their traditional savings contracts in 20002003, many companies have been able to accumulate new policyholder reserves since 2005, thanks to improved financial results. This will allow them to smooth policyholder returns in the coming years in the event that financial results deteriorate again. Figure 20: Provision for Bonuses / Total Life Liabilities 2.9% 2.7% 2.5% 2.3% 2.1% 1.9% 1.7% 1.5% 2001
2002
Source: ACAM
13
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
2003
2004
2005
Industry Outlook
Moody’s Insurance
French Life Insurance
Asset Quality and Asset Liability Management A conservative asset mix despite a growing exposure to equities Bonds represent around 77% of life insurers’ portfolios (excluding unit-linked assets), which Moody’s considers as a conservative asset mix. Furthermore, government bonds or corporate investment-grade instruments are predominant in the bond portfolios. However, French insurers are now allocating a larger portion of their portfolios to equities than in the past. This trend is driven by their desire to increase financial returns in a low interest-rate environment. Also, the French government has recently encouraged insurers to invest into equities and private equity. This trend manifests itself in the creation of a new product, Euro-diversified contracts, in which the insurer only provides a capital guarantee at maturity (and not during the term of the policy) thus enabling itself to adopt a higher-risk investment policy. However, sales of this product have yet to take off. Figure 21: Breakdown of Investments - Fair Value - 31 March 2006 Loans Other Real Estate 1% 2% 4%
Equities 16%
Bonds 77% Source: FFSA
Total Investments: EUR1,955 billion
The proportion of equities in the fair value of investments has also increased recently as a result of falling bond values following the increase in interest rates.
Liquidity risk is low Figure 22: Cash, Bonds and Equities as a % Net Liabilities Book Value
Figure 23: Cash, Bonds and Equities as a % Net Liabilities Fair Value
120%
120%
100%
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
0% 2001
2002
2003 Cash & Bonds
Source: ACAM
2004
2005
2001
excluding unit-linked assets and liabilities
2002
2003 Cash & Bonds
Equities Source: ACAM
2004
2005
Equities excluding unit-linked assets and liabilities
Moody’s believes that liquidity risk is low in the French market. Net technical liabilities are fully covered by a satisfactory amount of liquid assets. Furthermore, many traditional savings contracts still provide returns above the risk-free rate (see Appendix), thus limiting the risk of widescale surrenders. In addition, life insurers increasingly use derivatives as part of their ALM strategies to hedge against the negative effects of rising interest rates. Moody’s also believes that many insurers will increasingly manage the risks related to embedded options through use of derivatives, using a dynamic approach.
14
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance Capitalisation and Financial Leverage The solvency ratios of French life insurers are usually lower than in non-life. We attribute the recent changes in these ratios solely to the trend in unrealised gains (which increased in 2004 and 2005 essentially thanks to equities, and then decreased in 2006 due to a rise in interest rates). Further improvement could occur thanks to a focus on unit-linked products, since they require less capital than endowments. Figure 24: Available Margin as a % of Required Margin 400% 350% 300% 250% 200% 150% 100% 50% 0% 2001
2002
2003
2004
2005
2006
Unrealised Gains Eligible Subordinated Debt Shareholders' Funds (net of intangibles) Available Margin
Source: ACAM
Furthermore, French life operating companies use subordinated debt more frequently than their non-life counterparts. This is particularly true for bancassurers, which have been established only recently and have recorded rapid growth in recent years, with a corresponding high need for capital. For many of these companies, shareholders’ funds are usually lower than their required solvency margin. Solvency II could lead to an increased issuance of subordinated debt, with more regulatory credit becoming available for hybrid instruments. At the same time, Solvency II may result in more onerous capital requirements for some insurers such that shareholders’ equity alone may not be fully sufficient to meet them. We therefore expect to see an increased volume of hybrid issuance in the years to come.
Figure 25: Subordinated Debts as a % of Shareholders' Funds Company Name
2000
2002
2003
2004
2005
ABP Vie
N/A
N/A
61%
54%
58%
63%
ACM Vie SA
0%
0%
0%
0%
6%
5%
AGF Vie
0%
0%
0%
0%
0%
0%
Aviva Vie
N/A
0%
0%
0%
0%
0%
AXA France Vie SA
N/A
0%
0%
0%
0%
0%
Cardif Assurance Vie
11%
10%
23%
N/A
47%
33%
CNP Assurances
N/A
23%
28%
33%
37%
41%
Ecureuil Vie
17%
21%
25%
35%
44%
47%
Erisa Vie
N/A
N/A
25%
23%
N/A
N/A
Generali France Assurances Vie
0%
0%
0%
0%
0%
0%
Groupama Vie
0%
0%
0%
0%
0%
0%
La Féderation Continentale
18%
3%
5%
3%
3%
3%
La Mondiale
49%
44%
55%
71%
70%
N/A
Mutavie
79%
71%
60%
50%
45%
40%
Natio Vie
7%
13%
13%
11%
36%
N/A
Prédica
20%
23%
25%
28%
63%
61%
Sogécap
19%
25%
46%
55%
61%
49%
Source: Moody's database
15
2001
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance French life insurers may also be tempted enter into reinsurance agreements to lower capital requirements. Reinsurance has been limited so far in the life sector (e.g. the premiums retention ratio was 92% in 2005) and is mainly used by companies to cover themselves against catastrophic events such as epidemics. Nonetheless, alternatives to reinsurance are now available and transactions such as mortality risk securitisation completed by Axa in 2006 may become more common.
16
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance
Appendix: Return of Traditional Savings Contracts for Major Contracts French Life Insurance
17
Company
Contract
2006 Return
2005 Return
ACMN VIE (Crédit Mutuel du Nord)
Plan Jinko
4.25%
4.25%
ACMN VIE (Crédit Mutuel du Nord)
Plan Libre Projet
4.05%
4,05 % à 4,5%
ACMN VIE (Crédit Mutuel du Nord)
Horizon Patrimoine (multisupport)
4.50%
4.55%
ADIF (MMA)
Adif Optimum (Fds en € du MS)
4.40%
4.55%
AFER (Aviva)
Compte Afer
4.33%
4.41%
AG2R - Prima Epargne
MultiPrima
4.50%
4.50%
AGF VIE
Tellus
4.15%
4.25%
AGPM
Plan Eparmil
4.52%
4.70%
ASAC FAPES (AGF)
Epargne Retraite 1 et 2
4.48%
4.51%
ASAC FAPES (Generali)
Epargne Retraite multigestion
4.50%
4.50%
ASSURANCES BANQUES POPULAIRES
Fructi Placement
3.80%
3,80 % à 4,20 %
ASSURANCES BANQUES POPULAIRES
Fructi - Actif Vie
4.20%
3,80 % à 4,20 %
ASSURANCES BANQUES POPULAIRES
Fructi-Sélection vie
3.80%
3,80 % à 4,20 %
AVIVA VIE
Sélection International
3.75%
4.05%
AXA ASSURANCES
Expantiel Euro
4.25%
4.42%
AXA ASSURANCES
Figures libres Planis Euro
4.35%
4.42%
AXA ASSURANCES
Figures libres Fiabilis
4.35%
4.42%
AXA ASSURANCES
Odyssiel
4.35%
4.42%
AXA ASSURANCES AGIPI
Cler
4.38%
4.50%
AZUR
Dialogue
4.40%
4.55%
BANQUE POSTALE
GMO Poste Avenir
4.00%
4.00%
CAPMA-CAPMI
Dynavie
4.85%
4.90%
CARAC
Compte Epargne Carac
4.50%
4.45%
CARDIF
Cardif Multiplus 2
4.02%
4.04%
CONSERVATEUR (LE)
Arep
5.00%
5.00%
ECUREUIL VIE
Initiatives Transmission
3.85%
3.85%
ECUREUIL VIE
Nuances Plus
4.30%
4.30%
ECUREUIL VIE
Nuance 3 D
4.00%
4.00%
ESCA
Perle
4.62%
4.82%
GAIPARE (AGF)
Livret Gaipare
4.42%
4.46%
GAN VIE
Libertance
4.40%
4.40%
GAN PATRIMOINE
Libregan
4.35%
4.50%
GAN VIE
Chromatys
3.75%
4.40%
GENERALI FRANCE
Generali Exel
4.02%
4.11%
GENERALI FRANCE
Préférence
3.85%
4.00%
GENERALI FRANCE
Scenario Retraite
4.69%
4.74%
GENERALI FRANCE
Phi
4.39%
4.44%
GMF VIE
Multéo (Fds en € du MS)
4.55%
4.55%
GMF VIE
Altinéo
4.55%
4.55%
GROUPAMA
Groupama Epargne
4.20%
4.20%
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance French Life Insurance Company
Contract
2006 Return
2005 Return
GROUPAMA
Sora Epargne
4.20%
4.20%
GROUPAMA
Sora Performance
4.20%
4.20%
GROUPAMA
Groupama Modulation (Fds en € du MS)
4.20%
4.20%
LEGAL & GENERAL
Concordances 2
4.40%
4.23%
MAAF VIE
Compte Epargne MAAF
4.61%
4.71%
MAAF VIE
Dynalto (Fds en € du MS)
4.11%
4.38%
MAAF VIE
Winnéo (Fds en € du MS)
4.01%
4.21%
MACSF EPARGNE RETRAITE
Retraite Epargne santé
4.65%
4.77%
MAIF
Nouveau Cap
4.15%
4.01%
MMA
MDM Croissance
4.40%
4.55%
MMA
MMA Multisupports
4.40%
4.55%
MUTUALITE FRANCAISE
Livret Mutex
4.50%
4.10%
MUTAVIE ( MACIF )
Actipep 1
4.49%
4.80%
MUTAVIE ( MACIF )
Compte Actiplus Option 1
4.00%
4.20%
MUTAVIE ( MACIF )
Actipep 2
3.74%
4.05%
MUTAVIE ( MACIF )
Actiplus Retraite
4.00%
4.20%
MUTAVIE ( MACIF )
Compte Actiplus Option 2
3.25%
3.45%
MUTAVIE ( MACIF )
Actifonds (Fds en € du MS et du DSK)
3.65%
3.85%
NEUFLIZE VIE
Hoche Patrimoine 2ème génération
4.15%
4.25%
PARNASSE - MAIF
Nouveau Cap (nouvelle formule)
4.15%
4.01%
PARNASSE - MAIF
Libre Cap (Fds en € du MS)
4.09%
3.80%
PREDICA
Prédige
3.70%
3.90%
PREDICA
Confluence
3.70%
3.80%
PREDICA
Prédicimme (bon de capitalisation)
3.90%
4.00%
suravenir
Florige
4.10%
4.30%
PREDICA
Prédiane
3.40%
3.60%
PREDICA
Carissime
3.70%
3.80%
SAF BTP Vie
Livret confiance
4.30%
4.30%
SAF BTP Vie
Billet confiance
4.30%
4.30%
SMAVIE - BTP
Batiretraite 2
4.54%
4.26%
SWISS LIFE ASS ET RETRAITE
Garantie Retraite
4.22%
4.42%
SWISS LIFE ASS ET RETRAITE
Suisse Avenir
4.20%
4.40%
SOGECAP
Sequoia (Fds en € du MS)
4.00% à 4.20%
4,00 à 4,20 %
SOGECAP
Erable (Fds en € du MS)
4.00% à 4.20%
4,00 à 4,20 %
SURAVENIR
Symphonis
4.35%
4.45%
UAF PATRIMOINE
Alyss
3.95%
4.05%
Source: L'Argus de l'Assurance
18
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance
To order reprints of this report (100 copies minimum), please call 1.212.553.1658. Report Number: 104934 Authors
Production Associate
Timour Boudkeev Benjamin Serra
Tara Cheparev
© Copyright 2007, Moody’s Investors Service, Inc. and/or its licensors and affiliates including Moody’s Assurance Company, Inc. (together, “MOODY’S”). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, such information is provided “as is” without warranty of any kind and MOODY’S, in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such information. Under no circumstances shall MOODY’S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY’S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY’S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings and financial reporting analysis observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling. MOODY’S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MOODY’S have, prior to assignment of any rating, agreed to pay to MOODY’S for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,400,000. Moody’s Corporation (MCO) and its wholly-owned credit rating agency subsidiary, Moody’s Investors Service (MIS), also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually on Moody’s website at www.moodys.com under the heading “Shareholder Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”
19
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Moody’s
Insurance
Industry Outlook October 2007
French Life Insurance
Table of Contents: Summary Opinion
1
Market Overview
3
Distribution
7
Product Risk
8
Profitability
11
Reserve Adequacy
13
Asset Quality and Asset Liability Management
14
Stable outlook reflects potential for further, though slower, growth and sustained new business margins; challenges include increased litigation risk and adapting the capital structure to Solvency II requirements Summary Opinion
Analyst Contacts: London
44.20.7772.5454
0 Benjamin Serra Associate Analyst
0 Timour Boudkeev Vice President -Senior Credit Officer Simon Harris Team Managing Director
The French life insurance market has experienced solid growth since 2004, and a further acceleration in 2006 thanks to a confluence of favourable but non-recurring factors. Moody’s therefore anticipates a slowdown in growth for the French market in the short term, which should in particular affect those life insurers that are subsidiaries of banks, which benefited the most from growth in 2006. However, we consider that the market has not yet reached maturity, as life insurance represents a constantly rising share of savings by French households, thanks in particular to the growing role of distribution channels such as banks and, more recently, independent financial advisors, which sell both banking and insurance products. Moody’s believes that the overall liability risk of French life companies has been decreasing in recent years. The new traditional savings products tend to have low guarantees and the stock of policies with high guarantees is decreasing. In addition, unit-linked products account for a growing proportion of life insurance sales and liabilities. We note that most companies are now focusing their marketing efforts on these products as they tend to have more attractive margins – although a significant increase in interest rates could potentially make traditional products more attractive again.
Industry Outlook
Moody’s Insurance
French Life Insurance Furthermore, liabilities relating to annuities remain low and longevity risk is well contained as a result of prudent reserving. We do not anticipate rapid growth in pension business in the short term. In Moody’s view, group pension business is likely to develop first, driven by employee savings schemes, followed by individual pension business as the substitution rate of state pensions is set to decrease. Another possible development is the combination of retirement and long-term care products to offer comprehensive retirement solutions to the ageing population. Nonetheless, the success of unit-linked products and the recently tightened regulation around the provision of information to policyholders increase the exposure of life insurers to legal risk, as evidenced by recent cases in which companies were forced by courts to reimburse losses suffered by policyholders. The French life insurance market is also experiencing intensifying competition. Low-cost players and policyholder associations have recently exerted pressure on fees, which may reduce the profitability of life insurers going forward. In the medium term, Moody’s considers that one of the main challenges for the French life insurers will be to anticipate policyholder behaviour patterns, which have been very stable so far. However, we believe that financial fundamentals are sound in the French market, with prudent reserving practices and low asset risk. Capitalisation is good, although partly reliant on subordinated debt, particularly in the case of companies experiencing rapid growth. Future sales of French life insurance products will also be heavily dependent on tax incentives. Any adverse change in tax advantages for insurance products – such as the recent modification of the inheritance tax regime – could have a negative impact on market growth.
Credit Strengths !
Diversity of players and distribution channels leading to product innovation
!
Comparatively low risks on the liability side of the balance sheet thanks to a historical focus on unit-linked products as well as a less risky traditional savings business (declining guaranteed rates)
!
Sound financial fundamentals with prudent reserving and low asset risk
Credit Challenges
2
!
Limiting the legal risk in a context of tighter regulation of policyholder disclosure and an increasingly litigious environment in France
!
Capitalising on growth opportunities, especially in the retirement business, and anticipating changes in policyholder behaviour in the context of ageing population and rising interest rates
!
Maintaining recent good levels of profitability in the context of growing competition and pressure on fees
!
Capitalisation partly reliant on subordinated debt and policyholder capital
!
In the long term, adapting financial policies, risk management processes and capitalisation to the requirements of Solvency II
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance
Market Overview A growing market that has not yet reached maturity, despite comparatively high penetration Figure 1: Life Gross Premiums Written by Country - 2005
Figure 2: Life Insurance Penetration Rate by Country - 2005 10.0%
160 EUR billion
8.0% 120
6.0%
80
4.0%
40
2.0%
0
So urce: CEA
d i te Un
m ce n do ng Fra Ki
0.0%
s d y m a in nd en an nd iu an m erl a el g Sp erl a wed Finl er B S i tz G eth w N S e Th
Ita
ly
Source: CEA
s d y y n e e m om ai nd Ital d en rag l and nc l an giu an gd l a n e Sp rm erl a e er Fi Be Ki n Fr e Sw p Av i tz G eth d u N Sw i te ro e Un G Th
France is the second-largest European life insurance market, and the fourth-largest globally. The life insurance penetration rate in France is also one of the highest in Europe. The French life insurance industry recorded sustainable growth in recent years, with an 11% CAGR of gross premiums written and a 13% CAGR of net inflows in the last five years. Figure 3: Life Insurance Growth
Figure 4: Growth of Mathematical Provisions
160
70 65
120
50 45 40
100 80
35 30
60
1100 1000 EUR billion
60 55
Net Inflows - EUR billion
GPW - EUR billion
140
25 20
40 2001
2002
2003
2004
2005
900 800 700 600 500
2006
2001 GPW
Source: FFSA
Net Inflow s
2002
2003
Source: FFSA
160
45
140
40
120
35 30
100
25
80
20
60
15
40
10
20
5
0
0 2001
2002 Total
3
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
2003 Other Contracts
2004
2005
2006
Unit-Linked Contracts
Unit-Linked Contracts - EUR billion
Total and Other Contracts - EUR billion
Figure 5: Gross Premiums Written
2004
2005
2006
Industry Outlook
Moody’s Insurance
French Life Insurance Part of the growth was related to cyclical events: !
a favourable financial markets environment has increased sales of unit-linked contracts
!
following the reduction in tax benefits for some banking products , assets have been transferred from banks to insurance companies
!
some companies accounted for the conversion of traditional savings contracts into unit-linked contracts
1
2
operated according to the “Fourgous amendment” as revenues !
to a lesser extent, growth in home loans has translated into increased credit insurance premiums.
Therefore, we anticipate a slowdown in insurance premiums growth in the short term. This should particularly affect subsidiaries of banks, which were the main beneficiaries of transfers from banking products and the growth in credit insurance. However, Moody’s believes that the French life insurance sector has not yet reached maturity, and we see some growth potential, both in savings and in retirement products. Insurance savings products have represented a growing share of French household savings for 20 years, thanks mainly to the following developments: !
tax advantages for insurance policyholders
!
the growing involvement of banks in the life insurance market
!
a decline in interest rates, which has made regulated banking products less attractive than insurance savings contracts
!
product innovation with a growing range of investment strategies available within insurance products, making them increasingly comparable and competitive with other financial products
The recent increase in interest rates could weaken the competitiveness of traditional savings products, but taxation policy remains advantageous for insurers, despite recent changes in the inheritance tax regime. We believe that future growth of life insurance will mainly be driven by product innovation. Figure 6: Breakdown of Savings of French Households 100% Liquidities
80% 60%
Shares and Bonds
40%
2005:36.3% 20%
1996:26.7%
Insurance
20 05
20 04
20 03
20 02
20 01
20 00
19 99
Source: CEA
19 98
19 97
19 96
0%
1 Since 2006, fiscal policy related to the PELs (Plan d’Epargne Logement, a regulated savings account) opened for more than 12 years has been less attractive, which led many customers to close these accounts and invest their funds in insurance contracts. 2 In 2005, the “Fourgous amendment” authorised the conversion of traditional savings contract into products combining unit-linked and traditional savings guarantees, without any tax penalties, whatever the age of the contract.
4
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance Life insurers will also enjoy growth opportunities in the pension business. Benefits paid by insurance companies, mutuals and provident associations represented only 3.4% of total retirement benefits in France in 3
2005 . A predictable decrease in the substitution rate of state pensions will translate into a growing demand for pension insurance products. 4
Furthermore, pension funds managed internally by certain employers have to be transferred to provident associations or insurance companies before the end of 2008, which presents another potential source of growth. In the medium term the French life insurance market may reach maturity, and companies will face growing outflows, as the number of retired persons will increase. However, part of the outflows could be converted into single-premium annuities. Figure 7: Age of Outstanding Life Insurance Contracts - 2004 more than 20 years, 12% 17 to 20 years, 5%
1 to 4 years, 29%
13 to 16 years, 12%
9 to 12 years, 21%
5 to 8 years, 21%
Source: INSEE
A more concentrated market than non-life, but amongst the most fragmented in Europe Figure 8: Number of French Life Insurance Companies 140 135 130 125 120 115 110 105
20 06
20 05
20 04
20 03
20 02
20 01
20 00
19 99
19 98
19 97
100
Source: ACAM
In line with what we have observed in the rest of Europe, the insurance sector in France has been undergoing consolidation for the past ten years, but this trend has now slowed down. In recent years, most mergers have occurred between companies in the same group, however co-operation agreements between companies have also become more common. At the end of 2005, two major mutual groups – MAAF-MMA and Azur-GMF – 5
merged to form Covea SGAM . Fewer companies operate in the life market than in non–life; nevertheless, the French life market is among the most fragmented in Europe.
3 Source: FFSA. 4 Known as IRS (Institutions de Retraite Supplémentaire). 5 Société de Groupement d’Assurances Mutuelles. See Special Comment “Sociétés de Groupes d’Assurances Mutuelles (SGAMs)”, April 2004 (81852) – French translation (81855).
5
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance Figure 9: Market Share of the five largest life insurance groups United Kingdom
1993
2004
30.4%
50.0%
France
47.0%
55.6%
Italy
49.4%
62.8%
Germany
30.9%
N/A
The Netherlands
55.7%
74.1%
Belgium
61.5%
73.5%
Spain
37.2%
41.5%
Switzerland
71.1%
78.8%
Sweden
72.5%
70.3%
Finland
95.0%
84.9%
Total EU
41.9%
57.9%
Source: CEA
A predominance of banking groups in the top league There has been no change in position among the top five players in recent years, but more movement has taken place among the top ten players. The most notable development was the increased market share of banking groups, with five banking groups now represented among the top eight players (Caisses d’Epargne as a member of the CNP Group, Crédit Agricole, BNP Paribas, Société Générale and ACM, which overtook AGF in 2005).
Figure 10: Market Shares of the Top 20 Groups and the Top 20 Operating Companies in the French Life Industry - 2005 GPW (EUR million)
Mkt Share
GPW (EUR million)
Mkt Share
CNP
21,489
17.2%
Prédica
17,821
14.2%
Crédit Agricole
17,825
14.2%
CNP Assurances
11,561
9.2%
Axa
12,156
9.7%
Axa France Vie
11,379
9.1%
Generali
9,191
7.3%
Cardif Assurances Vie
9,609
7.7%
BNP Paribas
9,021
7.2%
Ecureuil Vie
9,425
7.5%
Société Générale
7,728
6.2%
Sogécap
7,631
6.1%
ACM
5,850
4.7%
ACM Vie SA
4,992
4.0%
AGF - Allianz
5,177
4.1%
La Fédération Continentale
4,985
4.0%
Aviva
5,053
4.0%
AGF Vie
4,216
3.4%
Groupama
4,220
3.4%
La Mondiale partenaire
3,104
2.5%
La Mondiale
3,968
3.2%
Assurances Banque Populaire Vie
2,887
2.3%
Swiss Life
3,410
2.7%
Generali France Assurances Vie
2,697
2.2%
Covéa
3,099
2.5%
Suravenir
2,229
1.8%
Natexis-BP
2,953
2.4%
Aviva Vie
2,229
1.8%
GPW (EUR million)
Mkt Share
2,510
2.0%
Group
Group Arkéa
6
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Operating Company
Operating Company Mutavie
GPW (EUR million) 1,792
Mkt Share 1.4%
Industry Outlook
Moody’s Insurance
French Life Insurance MACIF
1,792
1.4%
Groupama Vie
1,759
1.4%
MACSF
1,018
0.8%
GPA Vie
1,375
1.1%
914
0.7%
Société d'Epargne Viagère
1,194
1.0%
Médéric ACMN
833
0.7%
La Mondiale
1,068
0.9%
Prépar
497
0.4%
Gan Assurances Vie
1,051
0.8%
Total Top-20
118,704
94.8%
Total Top-20
103,004
82.3%
Total (Direct)
125,182
100.0%
Total (Direct)
125,182
100.0%
Source: L'Argus de l'Assurance
Distribution Distribution is dominated by banks, but non-proprietary networks play an increasingly important role Banks dominate the life insurance distribution, having continually increased their market share for the past 20 years. In recent years, insurance subsidiaries of banks have benefited from a change in the taxation of banking products (see above) and the resulting transfers of funds to insurance products. The growth in home loans has also had a positive effect on credit insurance premiums. Banks have benefited from their well-developed retail networks. However, given that most sources of growth from these channels are non-recurring, Moody’s believes that the market share of life insurers owned by banks is unlikely to increase much further from current levels. Figure 11: Breakdow n of Gross Prem ium s Written by Distribution Channel - 2006
Salaried Sales Force 15%
Other 2%
Brokers 12% Banking Channels 64%
Tied Agents 7%
Source: FFSA
Total 2006: EUR155.2 billion
Furthermore, distribution through non-proprietary networks has developed more recently in the French market. 6
Financial advisors have the ability to offer a wide range of financial products to their customers, both assetbased and insurance products. This distribution channel now accounts for more than 10% of retail insurance premiums. In addition, rapid growth of this independent distribution channel has influenced the structure of insurance products, especially unit-linked. While traditional insurers and bank subsidiaries usually offer a limited range of funds (mainly those managed by the asset management subsidiary of the related group), financial advisors typically offer an extensive list of funds from different providers.
6 Known as “Conseillers en Gestion de Patrimoine Indépendants” (CGPI) in the 2005 Financial Security Act.
7
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance Underwriting associations have also played a major role in the distribution of life insurance products and have contributed to increased competition in the French market. These associations underwrite contracts on behalf of all members, and thanks to their size they have been able to negotiate fees. The largest such associations are: AFER (with Aviva), AMPHITEA (La Mondiale), AGIPI (Axa), ADIF (MMA) and Gaipare (AGF and Fortis Insurance). Mutuals without intermediaries are also keen to increase their market share in life insurance. However, their networks, historically trained to sell non-life insurance, sometimes lack expertise in life. Furthermore, their policyholders are on average more risk-averse and do not have an appetite for unit-linked contracts, which tends to reduce their growth potential as well as new business margins. In addition, life insurance products are increasingly sold through the internet. These products differentiate themselves by low entrance fees and therefore primarily compete with products sold by financial advisors to customers not keen on paying for advice. The success of this channel remains marginal for the time being but its market share might increase as competition in the French market focuses increasingly on fees. As far as group life insurance is concerned, brokers remain the predominant distribution channel, with a market share of around 40%.
Life insurance distribution is increasingly regulated During the last two years, new regulation of insurance distribution has been introduced. In particular, a new law on insurance intermediaries was enacted in 2006. This regulation has an impact on both intermediaries and insurers, as it sets out the information that insurers have to provide to policyholders. This issue is all the more important as French policyholders have the right to cancel their contracts (and to be refunded) for up to 30 days after receiving all the information. Some policyholders who purchased a unit-linked contract in 2000, when the stock markets were at their peak, attempted to exercise this option many years after the effective date of the contract, when the surrender value of the contract was significantly below the premium paid, on the basis that they had not at the time received all the required information. In most proceedings that came to court, insurance companies that challenged the good faith of these policyholders lost their cases.
7
The latest regulations should define the required information and avoid differences of interpretation that occurred in the past. However, at the same time, it is becoming increasingly costly for the companies to comply with the regulation.
Product Risk Figure 12: Breakdown of Technical Liabilities by Line of Business - 2005 Unit-Linked Contracts 20%
Individual Protection Contracts 0%
Figure 13: Breakdown of Gross Premiums Written by Line of Individual Business - 2005 Group Protection
Group Protection Contracts 1%
Group Traditional Savings and Retirement Contracts 7%
Unit-Linked Contracts 23%
Individual Traditional Savings and Retirement Contracts 72% Total Technical Liabilities: EUR965.6 billion
Source: ACAM
Group Traditional Savings and Retirement Contracts 4% Source: ACAM
7 For example, the French Court of Appeal (Cour de Cassation) ruled against La Mondiale and Axa in March 2006.
8
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Protection Contracts 1%
Contracts 4%
PERPs 1%
Individual Traditional Savings and Retirement Contracts 67%
Total Gross Premiums Written: EUR120.2 billion
Industry Outlook
Moody’s Insurance
French Life Insurance Savings business tends to be less risky for insurers thanks to a growing share of unit-linked contracts in the life business… In France, retail traditional savings contracts prevail in both reserves and new business. However, unit-linked products represent a meaningful share of life business and are becoming increasingly important. Figure 14: Share of Unit-Linked Contracts in Life Insurance 30% 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 2001
2002
2003
2004
2005
2006
Share of UL contracts in Technical Liabilities Source: ACAM
Share of UL contracts in Gross Premiums Written
Since 2002, liabilities related to unit-linked products have grown due to appreciation of equities; new unitlinked business also experienced rapid growth in this environment. Nevertheless, the current levels have only reached levels witnessed in 2001, just before the financial market downturn, and are still below the levels of 2000. However, Moody’s believes that the proportion of unit-linked products in total liabilities is likely to increase in the future, for the following reasons: !
insurance companies strongly promote unit-linked products due to their higher margins and lower risk
!
thanks to the “Fourgous amendment” (see above), many traditional savings contracts have been transformed into products including a compulsory minimal share of unit-linked guarantees
!
the growing involvement of independent financial advisors in life insurance distribution has attracted policyholders that are less risk-averse
!
guarantees on traditional savings policies are less attractive than in the past, offering a less obvious tradeoff to policyholders than in 2001.
Furthermore, as Solvency II is likely to penalise investments in equities for traditional products, this may further encourage sales of unit-linked contracts. If the increased share of unit-linked contracts is maintained, this would be a credit positive for French life insurance companies because of higher margins and lower capital requirements associated with them. However, even though the financial risk is theoretically transferred to the policyholder in such contracts, Moody’s notes that litigation risk remains high in France. A number of legal cases have appeared in recent years, illustrating the risks related to unit-linked products:
9
!
The risk related to the renunciation right by a policyholder (see above). Some companies have been ordered by courts to reimburse their policyholders in cases where the surrender value of the contracts was below the premiums paid, because of insufficient information, or simply because the format in which the information was provided was incorrect.
!
The reputation risk in cases of misselling (e.g. between 1999 and 2000, CNP sold unit-linked contracts through the Post Office network, and some policyholders were not aware that they had no capital guarantee; when they realised that their investment had lost in value, some of them sued La Poste;
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance 8
although the Post Office did not have to make any payments , it may have led to a loss of trust in this distribution network). Litigation risk was largely contained so far because class actions are not allowed in French legislation. However, the French government is planning to permit collective claims in order to enhance consumer protection.
…and a less risky traditional savings business Figure 15: Average Return of Traditional Savings Contracts 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% 1997
1998
1999
2000
2001
2002
2003
2004
2005
Average Reurn = interests attributed to policyholders / average mathematical provisions
Source: ACAM
Despite the continuing predominance of traditional savings products in the liabilities of French life insurers, Moody’s considers that the average liability risk is decreasing. Indeed, companies used to sell contracts that offered high guarantees for a long period of time, whereas most new products now offer a 0% guarantee, or a higher guaranteed return but for one year only. French companies still have liabilities related to old contracts, but the average guarantee decreases rapidly as older contracts (bearing the highest guarantees) mature and also because many companies amended contracts to lower the level of guarantees. Such changes have sometimes been easier to implement as many French contracts are underwritten on a group basis by an association (in this case, the insurance company only needs the agreement of the association to amend the contract and it only has to inform the ultimate policyholders). However, we note that a new legal risk arose in the French market following these practices, as the regulator recently denounced such amendments because it considered that the associations were in some cases not 9
independent from the insurance companies. Nonetheless, we believe this risk is low, as in most cases the reduction in guarantees has been coupled with rebates (e.g. decrease in entrance fees for supplementary premiums or decrease in management fees). No major legal action has been initiated so far because of these amendments. Furthermore, a decree published in 2006 now clarifies the operating rules for these associations.
8 Although CNP was sanctioned by the Insurance Supervisory Authority. 9 In December 2004, the French Insurance Supervisory Authority sanctioned Predica because it amended one contract underwritten by the association Andecam (lowering the guaranteed return from 4.50% to 0.30%) and the regulator considered that the company was exposed to a legal risk that was not taken into account in the company’s reserves. This sanction was confirmed in March 2007 by the Conseil d’Etat.
10
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance Penetration of retirement products remains low, but these products should enjoy steady growth In France, 97% of retirement benefits are paid by the State, and insurance companies mainly sell group retirement contracts (purchased by employers for employees). They also offer retirement products aimed at non-salaried workers (“Contrats Madelin”). In 2003, the PERP (Plan d’Epargne Retraite Populaire), a new retirement product, was launched in the French market. This product has developed very slowly so far, despite its tax advantages, reflecting French policyholders’ limited appetite for annuities. Nonetheless, Moody’s believes that annuities will enjoy steady growth, as the substitution rate of state pensions is set to decrease. We also expect to witness an increase in pension insurance being offered as one element of a wider solution for an ageing population that combines both retirement and long-term care guarantees. Growth in retirement products is also likely, in our view, to be driven by group retirement covers, coupled with employee savings schemes – a trend that has already been observed in recent months. According to our estimates, immediate annuities represent around 10% of technical liabilities in the French market, and this percentage should remain stable in the short term. However, as retirement products develop further, the proportion of deferred annuities should increase. Notwithstanding this growth, we believe that longevity risk is well managed in France owing to prudent reserving rules (see below).
Protection contracts will remain a small part of the life insurance business Protection contracts represent around 5% of both life gross premiums written and life technical reserves. The vast majority are group contracts, combined with retirement guarantees, purchased by employers for their employees. Growth in mortgage loans has also recently been a factor driving the increased demand for credit insurance. In the coming years, insurers could increase sales of protection insurance as they develop their health and long-term care insurance business.
Profitability The industry has achieved technical profits through the cycle Technical results of the French life industry are largely driven by its financial results. Although profitability came under pressure during the period of declining interest rates, insurers managed to achieve sufficiently strong financial results (under French GAAP) to provide guaranteed returns on traditional savings contracts, thanks in particular to a stock of old high-coupon bonds. As these bonds mature, financial results may decline, but so will the average guarantees. Since most of the financial income is shared with policyholders in France, another major driver of technical results is the level of fees, particularly resulting from the unit-linked business. We note however that the growing share of liabilities related to unit-linked policies will further increase the correlation between underwriting results and the performance of equity markets. Acquisition and administrative costs have increased more slowly than gross premiums written and technical liabilities, and we believe many companies still have scope to further reduce their costs. However, distribution through independent financial advisors may increase acquisition costs.
11
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance Figure 16: Components of Net Technical Result (as a % of average liabilities) 2001
2002
2003
2004
2005
2006
Underwriting Result
0.8%
0.7%
1.0%
0.8%
0.9%
N/A
Financial Result (net of profit sharing)
0.5%
0.5%
0.3%
0.5%
0.4%
N/A
Acquisition and Administrative costs
1.0%
1.0%
1.0%
0.9%
0.9%
N/A
Reinsurance Result
0.1%
0.0%
0.1%
0.0%
0.1%
N/A
Net technical Result
0.4%
0.2%
0.4%
0.4%
0.4%
0.5%
Source: ACAM / FFSA
Figure 17: Components of Net Technical Result (as a % of GPW) 2001
2002
2003
2004
2005
2006
Underwriting Result
6.7%
5.7%
8.5%
6.5%
6.5%
N/A
Financial Result (net of profit sharing)
4.1%
4.0%
2.5%
3.7%
3.1%
N/A
Acquisition and Administrative costs
8.2%
8.4%
8.0%
7.4%
7.0%
N/A
Reinsurance Result
0.5%
0.2%
0.6%
0.3%
0.5%
N/A
Net technical Result
3.0%
1.5%
3.6%
3.0%
3.1%
3.3%
2005
2006
Figure 18: Return on Equity 2001 Return on Equity
11.1%
2002 4.3%
2003 10.4%
2004 9.8%
10.7%
12.1%
Equity
Net Result / Equity
Source: FFSA
Figure 19: Profitability of the Top 20 Groups - 2005 Group
Net Result
Equity
Group
Net Result
CNP
805
9511.0
8.5%
La Mondiale
54
1444.0
3.7%
Crédit Agricole
477
6875.0
6.9%
Swiss Life
46
1325.0
3.5%
Axa
547
3624.0
15.1%
Covéa
73
2437.0
3.0%
Generali
173
1321.0
13.1%
Natexis-BP
87
1011.0
8.6%
BNP Paribas
302
2614.0
11.6%
Arkéa
54
695.0
7.8%
Société Générale
112
2167.0
5.2%
MACIF
-51
457.0
-11.2%
ACM
211
2393.0
8.8%
MACSF
70
1094.0
6.4%
AGF - Allianz
417
2912.0
14.3%
Médéric
27
601.0
4.5%
Aviva
225
1970.0
11.4%
ACMN
23
223.0
10.3%
Groupama
141
2066.0
6.8%
Prépar
11
131.0
8.4%
Source: L'Argus de l'Assurance
12
Net Result / Equity
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance
Reserve Adequacy Life reserves are calculated according to prudent regulatory rules French life insurers have to comply with prudential rules for the calculation of their mathematical reserves, using prudent discount rates (60% of the risk-free rate for long-term contracts) and prescribed mortality tables. Mortality tables were updated in 2006 to take into account increased life expectancy. In addition, mortality tables that apply to the calculation of annuities reserves have been updated using statistics based on a population with an annuity contract. Consequently, this new table also takes into account the effect of adverse selection usually observed in pension insurance. For most insurers, the change in mortality tables will translate into an increase in mathematical reserves, which can be spread over 15 years.
Insurers factor in embedded options into their pricing In the past, French life insurance contracts used to include options that were neither priced for nor taken into account in reserving. This issue was raised in 2001 when the guaranteed minimum death benefit options embedded in some unit-linked policies went in the money after the downturn in stock markets. Most insurers now take these options into account in their reserve calculation. Nonetheless, in 2004 the regulator sanctioned Predica over inadequacy of reserves related to the guaranteed minimum death benefit option. However, Moody’s believes that the risk related to this specific option is low for the French industry. Many companies have also offered savings contracts with an option to convert the capital at maturity into an annuity benefit. For some companies, the conversion rates (discount rate and mortality table) are fixed at the underwriting date, which exposes these companies to a decline in the interest rate or to a change in the regulatory mortality table. However, the annuities conversion option has been rarely exercised historically and the low appetite of French policyholders for annuities should limit the risk in the short term.
Provisions for bonuses are being accumulated Having used their bonus pools to maintain attractive returns on their traditional savings contracts in 20002003, many companies have been able to accumulate new policyholder reserves since 2005, thanks to improved financial results. This will allow them to smooth policyholder returns in the coming years in the event that financial results deteriorate again. Figure 20: Provision for Bonuses / Total Life Liabilities 2.9% 2.7% 2.5% 2.3% 2.1% 1.9% 1.7% 1.5% 2001
2002
Source: ACAM
13
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
2003
2004
2005
Industry Outlook
Moody’s Insurance
French Life Insurance
Asset Quality and Asset Liability Management A conservative asset mix despite a growing exposure to equities Bonds represent around 77% of life insurers’ portfolios (excluding unit-linked assets), which Moody’s considers as a conservative asset mix. Furthermore, government bonds or corporate investment-grade instruments are predominant in the bond portfolios. However, French insurers are now allocating a larger portion of their portfolios to equities than in the past. This trend is driven by their desire to increase financial returns in a low interest-rate environment. Also, the French government has recently encouraged insurers to invest into equities and private equity. This trend manifests itself in the creation of a new product, Euro-diversified contracts, in which the insurer only provides a capital guarantee at maturity (and not during the term of the policy) thus enabling itself to adopt a higher-risk investment policy. However, sales of this product have yet to take off. Figure 21: Breakdown of Investments - Fair Value - 31 March 2006 Loans Other Real Estate 1% 2% 4%
Equities 16%
Bonds 77% Source: FFSA
Total Investments: EUR1,955 billion
The proportion of equities in the fair value of investments has also increased recently as a result of falling bond values following the increase in interest rates.
Liquidity risk is low Figure 22: Cash, Bonds and Equities as a % Net Liabilities Book Value
Figure 23: Cash, Bonds and Equities as a % Net Liabilities Fair Value
120%
120%
100%
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
0% 2001
2002
2003 Cash & Bonds
Source: ACAM
2004
2005
2001
excluding unit-linked assets and liabilities
2002
2003 Cash & Bonds
Equities Source: ACAM
2004
2005
Equities excluding unit-linked assets and liabilities
Moody’s believes that liquidity risk is low in the French market. Net technical liabilities are fully covered by a satisfactory amount of liquid assets. Furthermore, many traditional savings contracts still provide returns above the risk-free rate (see Appendix), thus limiting the risk of widescale surrenders. In addition, life insurers increasingly use derivatives as part of their ALM strategies to hedge against the negative effects of rising interest rates. Moody’s also believes that many insurers will increasingly manage the risks related to embedded options through use of derivatives, using a dynamic approach.
14
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance Capitalisation and Financial Leverage The solvency ratios of French life insurers are usually lower than in non-life. We attribute the recent changes in these ratios solely to the trend in unrealised gains (which increased in 2004 and 2005 essentially thanks to equities, and then decreased in 2006 due to a rise in interest rates). Further improvement could occur thanks to a focus on unit-linked products, since they require less capital than endowments. Figure 24: Available Margin as a % of Required Margin 400% 350% 300% 250% 200% 150% 100% 50% 0% 2001
2002
2003
2004
2005
2006
Unrealised Gains Eligible Subordinated Debt Shareholders' Funds (net of intangibles) Available Margin
Source: ACAM
Furthermore, French life operating companies use subordinated debt more frequently than their non-life counterparts. This is particularly true for bancassurers, which have been established only recently and have recorded rapid growth in recent years, with a corresponding high need for capital. For many of these companies, shareholders’ funds are usually lower than their required solvency margin. Solvency II could lead to an increased issuance of subordinated debt, with more regulatory credit becoming available for hybrid instruments. At the same time, Solvency II may result in more onerous capital requirements for some insurers such that shareholders’ equity alone may not be fully sufficient to meet them. We therefore expect to see an increased volume of hybrid issuance in the years to come.
Figure 25: Subordinated Debts as a % of Shareholders' Funds Company Name
2000
2002
2003
2004
2005
ABP Vie
N/A
N/A
61%
54%
58%
63%
ACM Vie SA
0%
0%
0%
0%
6%
5%
AGF Vie
0%
0%
0%
0%
0%
0%
Aviva Vie
N/A
0%
0%
0%
0%
0%
AXA France Vie SA
N/A
0%
0%
0%
0%
0%
Cardif Assurance Vie
11%
10%
23%
N/A
47%
33%
CNP Assurances
N/A
23%
28%
33%
37%
41%
Ecureuil Vie
17%
21%
25%
35%
44%
47%
Erisa Vie
N/A
N/A
25%
23%
N/A
N/A
Generali France Assurances Vie
0%
0%
0%
0%
0%
0%
Groupama Vie
0%
0%
0%
0%
0%
0%
La Féderation Continentale
18%
3%
5%
3%
3%
3%
La Mondiale
49%
44%
55%
71%
70%
N/A
Mutavie
79%
71%
60%
50%
45%
40%
Natio Vie
7%
13%
13%
11%
36%
N/A
Prédica
20%
23%
25%
28%
63%
61%
Sogécap
19%
25%
46%
55%
61%
49%
Source: Moody's database
15
2001
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance French life insurers may also be tempted enter into reinsurance agreements to lower capital requirements. Reinsurance has been limited so far in the life sector (e.g. the premiums retention ratio was 92% in 2005) and is mainly used by companies to cover themselves against catastrophic events such as epidemics. Nonetheless, alternatives to reinsurance are now available and transactions such as mortality risk securitisation completed by Axa in 2006 may become more common.
16
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance
Appendix: Return of Traditional Savings Contracts for Major Contracts French Life Insurance
17
Company
Contract
2006 Return
2005 Return
ACMN VIE (Crédit Mutuel du Nord)
Plan Jinko
4.25%
4.25%
ACMN VIE (Crédit Mutuel du Nord)
Plan Libre Projet
4.05%
4,05 % à 4,5%
ACMN VIE (Crédit Mutuel du Nord)
Horizon Patrimoine (multisupport)
4.50%
4.55%
ADIF (MMA)
Adif Optimum (Fds en € du MS)
4.40%
4.55%
AFER (Aviva)
Compte Afer
4.33%
4.41%
AG2R - Prima Epargne
MultiPrima
4.50%
4.50%
AGF VIE
Tellus
4.15%
4.25%
AGPM
Plan Eparmil
4.52%
4.70%
ASAC FAPES (AGF)
Epargne Retraite 1 et 2
4.48%
4.51%
ASAC FAPES (Generali)
Epargne Retraite multigestion
4.50%
4.50%
ASSURANCES BANQUES POPULAIRES
Fructi Placement
3.80%
3,80 % à 4,20 %
ASSURANCES BANQUES POPULAIRES
Fructi - Actif Vie
4.20%
3,80 % à 4,20 %
ASSURANCES BANQUES POPULAIRES
Fructi-Sélection vie
3.80%
3,80 % à 4,20 %
AVIVA VIE
Sélection International
3.75%
4.05%
AXA ASSURANCES
Expantiel Euro
4.25%
4.42%
AXA ASSURANCES
Figures libres Planis Euro
4.35%
4.42%
AXA ASSURANCES
Figures libres Fiabilis
4.35%
4.42%
AXA ASSURANCES
Odyssiel
4.35%
4.42%
AXA ASSURANCES AGIPI
Cler
4.38%
4.50%
AZUR
Dialogue
4.40%
4.55%
BANQUE POSTALE
GMO Poste Avenir
4.00%
4.00%
CAPMA-CAPMI
Dynavie
4.85%
4.90%
CARAC
Compte Epargne Carac
4.50%
4.45%
CARDIF
Cardif Multiplus 2
4.02%
4.04%
CONSERVATEUR (LE)
Arep
5.00%
5.00%
ECUREUIL VIE
Initiatives Transmission
3.85%
3.85%
ECUREUIL VIE
Nuances Plus
4.30%
4.30%
ECUREUIL VIE
Nuance 3 D
4.00%
4.00%
ESCA
Perle
4.62%
4.82%
GAIPARE (AGF)
Livret Gaipare
4.42%
4.46%
GAN VIE
Libertance
4.40%
4.40%
GAN PATRIMOINE
Libregan
4.35%
4.50%
GAN VIE
Chromatys
3.75%
4.40%
GENERALI FRANCE
Generali Exel
4.02%
4.11%
GENERALI FRANCE
Préférence
3.85%
4.00%
GENERALI FRANCE
Scenario Retraite
4.69%
4.74%
GENERALI FRANCE
Phi
4.39%
4.44%
GMF VIE
Multéo (Fds en € du MS)
4.55%
4.55%
GMF VIE
Altinéo
4.55%
4.55%
GROUPAMA
Groupama Epargne
4.20%
4.20%
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance French Life Insurance Company
Contract
2006 Return
2005 Return
GROUPAMA
Sora Epargne
4.20%
4.20%
GROUPAMA
Sora Performance
4.20%
4.20%
GROUPAMA
Groupama Modulation (Fds en € du MS)
4.20%
4.20%
LEGAL & GENERAL
Concordances 2
4.40%
4.23%
MAAF VIE
Compte Epargne MAAF
4.61%
4.71%
MAAF VIE
Dynalto (Fds en € du MS)
4.11%
4.38%
MAAF VIE
Winnéo (Fds en € du MS)
4.01%
4.21%
MACSF EPARGNE RETRAITE
Retraite Epargne santé
4.65%
4.77%
MAIF
Nouveau Cap
4.15%
4.01%
MMA
MDM Croissance
4.40%
4.55%
MMA
MMA Multisupports
4.40%
4.55%
MUTUALITE FRANCAISE
Livret Mutex
4.50%
4.10%
MUTAVIE ( MACIF )
Actipep 1
4.49%
4.80%
MUTAVIE ( MACIF )
Compte Actiplus Option 1
4.00%
4.20%
MUTAVIE ( MACIF )
Actipep 2
3.74%
4.05%
MUTAVIE ( MACIF )
Actiplus Retraite
4.00%
4.20%
MUTAVIE ( MACIF )
Compte Actiplus Option 2
3.25%
3.45%
MUTAVIE ( MACIF )
Actifonds (Fds en € du MS et du DSK)
3.65%
3.85%
NEUFLIZE VIE
Hoche Patrimoine 2ème génération
4.15%
4.25%
PARNASSE - MAIF
Nouveau Cap (nouvelle formule)
4.15%
4.01%
PARNASSE - MAIF
Libre Cap (Fds en € du MS)
4.09%
3.80%
PREDICA
Prédige
3.70%
3.90%
PREDICA
Confluence
3.70%
3.80%
PREDICA
Prédicimme (bon de capitalisation)
3.90%
4.00%
suravenir
Florige
4.10%
4.30%
PREDICA
Prédiane
3.40%
3.60%
PREDICA
Carissime
3.70%
3.80%
SAF BTP Vie
Livret confiance
4.30%
4.30%
SAF BTP Vie
Billet confiance
4.30%
4.30%
SMAVIE - BTP
Batiretraite 2
4.54%
4.26%
SWISS LIFE ASS ET RETRAITE
Garantie Retraite
4.22%
4.42%
SWISS LIFE ASS ET RETRAITE
Suisse Avenir
4.20%
4.40%
SOGECAP
Sequoia (Fds en € du MS)
4.00% à 4.20%
4,00 à 4,20 %
SOGECAP
Erable (Fds en € du MS)
4.00% à 4.20%
4,00 à 4,20 %
SURAVENIR
Symphonis
4.35%
4.45%
UAF PATRIMOINE
Alyss
3.95%
4.05%
Source: L'Argus de l'Assurance
18
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
Industry Outlook
Moody’s Insurance
French Life Insurance
To order reprints of this report (100 copies minimum), please call 1.212.553.1658. Report Number: 104934 Authors
Production Associate
Timour Boudkeev Benjamin Serra
Tara Cheparev
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19
October 2007 ! Industry Outlook ! Moody’s Insurance - French Life Insurance
