LONDON/FRANKFURT, June 16 (Reuters) – EU regulators are examining an Italian insurer’s failure for clues to assess the wider sector’s vulnerability to rising interest rates and whether companies owned by private equity funds face extra risks, three people familiar with the matter told Reuters.
Over the last year, the world’s major central banks have raised interest rates in response to the swiftest pace of inflation in decades, with the European Central Bank on Thursday raising its key rate to a 22-year high and signalling more to come.
The moves have helped financial institutions by increasing returns on investments and revenues, but they have also had negative effects. Silicon Valley Bank in the United States was caught off guard, prompting its demise and shaking confidence in the sector that spilled into Europe.
Now, the European Insurance and Occupational Pensions Authority (EIOPA) – an industry regulatory body akin to the European Banking Authority (EBA) – is assessing whether Eurovita’s financial troubles may provide early clues of future stress at other regional insurers, the people, who spoke on condition of anonymity, said.
British private equity firm Cinven acquired Eurovita, which offers life insurance and savings contracts, from fellow buyout house JC Flowers & Co in 2017. Under its ownership, Eurovita grew rapidly, distributing its products through several dozen banks.
But the insurer ran into trouble when rising interest rates reduced the value of its government bond holdings and prompted customers to redeem their savings contracts early to reinvest the money into higher-yielding products, forcing it into temporary administration.
Italian authorities are orchestrating a rescue plan that would divide Eurovita among the country’s top insurers, after an earlier 100 million euro ($109.43 million) injection from Cinven was insufficient to save it.
While EIOPA has not completed the analysis, its preliminary assessment suggests that Eurovita’s case stands apart, as the company had struggled for many years.
However, it has heightened the agency’s longstanding vigilance of buyout firms, as the first high-profile failure of a private equity-backed insurer in Europe, the people said.
Though it does not see an imminent threat, EIOPA deems Italian life insurers to be more exposed to early customer redemptions, as traditional savings products allow for funds to be withdrawn more easily than in other member states, the people said.
The agency has not decided how it will use the results of the analysis once it is concluded, but the findings could help raise awareness among national supervisors across the 27-country bloc, they added.
EIOPA, Eurovita and Italy’s Institute for the Supervision of Insurance (IVASS) declined to comment. Cinven also declined comment on the regulators’ approach.
Private equity firms have been drawn to life insurers as a source of long-term capital for their own investment activities. European regulators have been wary of potential misalignment between private equity’s typically shorter time-scales compared with life insurers, whose obligations to policyholders often span decades, the people said.
Private equity funds usually hold investments for under a decade before offloading them to other investors at a profit through a private sale or a stock market listing.
“Since their investment horizon is usually shorter than more traditional shareholders, there is a risk that capital is pulled out of the target undertaking with potential negative impact on policyholders’ protection,” EIOPA said in a statement last year about private equity’s growing interest in old life insurance books.
($1 = 0.9138 euros)
Reporting by Pablo Mayo Cerqueiro in London and Tom Sims in Frankfurt; additional reporting by Valentina Za in Milan; editing by John O’Donnell and Barbara Lewis
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