Eurovita/Cinven: flop raises concerns on buyout push into insurance

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Italy has had its fair share of bank collapses. The slow-motion implosion of Eurovita is the first time an Italian insurer has crashed into special administration. Higher interest rates derailed the group, a situation that was resolved last week. Insurers including Generali and Allianz will invest in a new company to secure Eurovita’s €10bn of assets.

European insurance regulators are investigating whether Eurovita’s failure posed any wider risks to financial stability. They are expected to focus on its ownership by private equity group Cinven. It is just one of the private capital businesses that have poured money into the life insurance sector in recent years in search of higher returns.

The failure of Eurovita began last year as savers redeemed policies to take advantage of higher rates elsewhere. Eurovita’s weakening capital position forced it to sell government bonds that had fallen in price.

Regulators demanded more capital from UK-based Cinven to prop up Eurovita’s solvency ratio. Cinven eventually stumped up €100mn But that was well short of the €400mn thought necessary to recapitalise the insurer.

Eurovita will now be broken up and its assets redistributed.

Private capital groups have long seen insurance as offering good-quality cash flows at higher levels than conventional lower-risk investments. In the US, about 12 per cent of life and annuity assets are now under private equity ownership, according to McKinsey. In Europe, buyout groups have conducted $25bn worth of deals in the life sector over the past decade. 

Rising rates mean lapse risks are growing at the same time that the quality of assets such as corporate bonds is falling.

This exacerbates concerns about medium-term investors such as private equity funds taking responsibility for long-term liabilities. They may be unwilling to take losses across the industry cycle. Financial engineering involving insurance played a part in the UK gilts mini-crisis last year.

Regulators are right to pay closer attention.