There are often large legacy portfolios that run on significantly outdated IT systems. This is increasingly becoming a problem that needs to be solved.

Insurers have sold a large number of policies that run on these IT systems, that were implemented decades ago. These have now often reached the end of their service life.

They originate from IT systems from the last 50 or 60 years, and are often programmed in ancient languages such as Cobol or APL. The actuaries and IT experts who programmed them are now retiring or have already retired. This means that the knowledge of how the contracts are implemented is disappearing. You then have an IT system where nobody really understands what it actually does any more.

The portfolios we review often have 1,000 different policies that have been sold to customers over decades, with different tariffs and corresponding obligations. These promises must be fulfilled. That's why the IT system is so important. Because you have to understand exactly what you have promised in detail, and be able to fulfil it precisely.

The majority of the market actually thinks this way. A few have already modernised their systems. Many are planning to do so in the coming years. The expectation is that the old systems will run for another three, five or seven years. But contracts often run for another 30, 40 or 50 years. The existing systems are not guaranteed to last that long.

You simply no longer know what the system is doing.

Exactly. That's why more and more is done manually. This leads to constantly rising running costs, and is very error-prone.

As Viridium, we can realise economies of scale because we take over fragmented life insurance portfolios, modernise them and then manage them on a standardised platform. As a life insurer, you have to ask yourself whether you can do this better than Viridium.

This is the most demanding part of our business model. But we have ten years of experience with this. In the beginning, we took over smaller portfolios. We have learnt more with every transaction. We were only able to manage the Generali takeover (now Proxalto) with the experience we had built up in the meantime.

What does the old IT system look like? How many different IT systems are there in the company? What does the data model look like? Are the contracts mapped correctly? We ensure this during the migration process. Some policyholders will even be better off than before.

No, if something is changed, it will be in favour of the customer. By transferring their contracts to us, they have several advantages: they have the certainty that their contract is running on a modern IT system that will continue to function for the next 50 years and longer. And Viridium's shareholders pay for the entire IT modernisation. In Germany, it would be permissible to split the IT costs equally between the company and the customer as part of the minimum allocation. This is also the rule in the market. But not for us.

We want to show that our customers are better off with us. The pure IT migration costs of the portfolios we took over totalled over 350 million euros. We have even invested over 600 million euros in our modern, standardised company platform with centralised customer service. 100% of this money came from our shareholders.

It doesn't feel like that to us. Viridium has only been around for ten years. In that time, we have grown from looking after 5 billion to 67 billion euros in capital investments. We are now one of the five largest German life insurers, with a market share of around 5%. But our business model is new to the German market. In the first few years, there was a big theoretical debate as to whether managing portfolios without new business via an external platform was good or bad.

We have been able to demonstrate the positive effects for the customer since two or three years. Three things are important for customers: the surpluses, the capital strength of the insurer, and a modern, durable and sustainable operating platform. We can offer all of this. That is why there is no longer any fundamental debate about the business model. We have become a normal part of the market.

At Proxalto (formerly Generali Leben), we were able to increase current surpluses from 1.25% to 2.35% after just four years. Coming from one of the lowest ratios in the market, we are now roughly in line with the market average. For Proxalto customers, we were able to generate 1 billion euros more over five years and set aside more for future surpluses than the previous owners.

According to the German minimum allocation regulation, the customer receives an average of 70% of the gross surplus, the shareholders and the tax authorities the remaining 30%. As a customer, you therefore want to be with a company that wants to earn money. We are proud to be able to show how good our business model is for the customer – and for the shareholders at the same time. These aligned interests also help us with further acquisitions.

I also think internal run-off is definitely worthwhile. The market is big enough. However, we have an important structural advantage: we have already done this several times and can manage inventories better and more cost-effectively. This learning curve is one of our unique selling points. If you only modernise once, you have to find the employees and the expertise. And then the portfolios shrink over time as the insurance contracts expire.

Yes, but we already have 3.4 million contracts on the platform. The portfolios we are looking at for further purchases are a fraction of the size of our current portfolios.

Of the more than 80 life insurers in Germany, only five have a market share of more than 5% each. Around 70% have a market share of less than 1%. This market structure does not seem to be in the interest of customers. Most life insurers run several IT systems. You can imagine how many such systems exist in Germany and have to be maintained. Consolidation therefore seems to us to be in the interests of customers.

For one thing, the larger companies have been quicker to recognise that external policy management has already worked in other markets. In addition, the IT migration costs are so high that we initially had a greater interest in taking over larger portfolios. However, we are investing significant resources to keep reducing these migration costs so that we can also take over smaller inventories in the future and then process them even faster and better. We will be able to do that.

The largest was Generali Leben, now Proxalto, which currently has 2.9 million policies. Before that it was Heidelberger Leben with 0.3 million policies, Skandia with 0.2 million policies and Entis with 0.1 million policies.

We are currently focussing on three topics: We are using the current phase, without ongoing acquisitions or integration, for investments in the double-digit million euro range in order to further improve the platform. This will prepare us for the next acquisitions. We are also supporting the owners in setting up a new shareholder structure. Finally, we are holding talks on further acquisitions.

When taking over life insurance portfolios, the reorganisation of investments is a central component. We only invest in fixed-interest securities – two thirds in government bonds and around one third in alternatives. The latter includes private debt, infrastructure and property, but not offices.

Data centres and student residences, for example. Our focus is on improving the risk profile. This includes asset/liability management in particular. In other words, we harmonise the maturities on the asset and liability side. While many life insurers have many open interest rate risks, we do not take such risks. Our investments are as insensitive as possible to interest rate fluctuations. We want to generate a stable, good return, regardless of whether interest rates are high or low. You can also see this in our stable solvency ratio.

We do the strategic asset allocation and asset/liability management internally. The actual asset management is done for us by others. We have awarded around 40 corresponding mandates for the various asset classes. We don't believe that we have the expertise to find the best individual investments. Only a few insurers are likely to have such world-class expertise.

We tell them what risk parameters we are prepared to accept. We do not invest in funds, but instead take direct stakes in private debt, for example, on our own platform alongside funds. The loans belong to us and correspond to our own risk management parameters. Of the 67 billion euros in investments, around 20 billion euros are accounted for by unit-linked life insurance policies and around 45 billion euros by traditional life insurance policies.

From 50 million to around 1 billion euros.

Equities are too volatile for a shrinking portfolio. However, Solvency II has also pushed life insurance out of the volatile part of what might be a very sensible long-term investment. This is mainly due to the mark-to-market valuation. We could discuss at length whether this is right or wrong.

Life insurance should invest for the long term to generate higher returns and, of course, withstand fluctuations. But in the Solvency II world, the corresponding options are limited. This has also made traditional life insurance with guarantees less attractive.

Generally speaking, higher interest rates are better for life insurance policies with a guarantee. However, this only applies if you as an insurer do a lot of new business or have a lot of free liquidity, which means you can actually invest the money at the interest rates that are now higher again. That's not so common in the market.

The low interest rates in the past few years were a strong motivation to sell portfolios to us. In the meantime, IT has become the main reason for selling portfolios. It can also free up management capacity and capital. And the sellers can concentrate better on their core competences and grow in new business. Overall, the turnaround in interest rates has not had a negative impact on the willingness to sell portfolios.