Ghost of Silicon Valley Bank turns up in Italy

UnipolSai Assicurazioni SpA

04/07/2023 12:10

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Lisa Jucca
       MILAN, July 4 (Reuters Breakingviews) - A crisis at a
small Italian insurer has rekindled concerns about the effect of
rising rates. The rapid collapse of Silicon Valley Bank earlier
this year was largely down to an ill-advised bond portfolio and
liabilities that were less sticky than assumed. While Italy’s
Eurovita isn’t a bank, its demise has some similarities with
events across the Atlantic.
    Eurovita, whose 2022 balance sheet was only about 15 billion
euros, chiefly offered life insurance products that
guaranteed policyholders’ invested capital and a fixed annual
return. But it sold the bulk of these products when euro zone
interest rates were at zero, or even negative. And like SVB,
it used customer funds to stock up on long-dated government
bonds.
    Rising rates mean these bonds have quickly lost value as
central bankers rapidly hiked interest rates to fight soaring
inflation. Meanwhile customers activated the option to redeem
their insurance policies in return for a fee, in order to shift
their money to more lucrative investments. When Eurovita’s
private equity owner Cinven refused to inject more capital into
Eurovita, the insurer found itself unable to repay customers,
prompting the Italian regulator to put it under special
administration.
    A rescue deal agreed on Friday may have prevented the crisis
from spreading further. But it came at a cost. Under pressure
from the economy ministry and the insurance watchdog, lenders
including Intesa Sanpaolo  ISP.MI , Banco BPM  BAMI.MI  and
BPER  EMII.MI  – which distributed Eurovita products – have had
to provide financing of 6 billion euros to guarantee the
remaining policies, two people close to the matter told Reuters
Breakingviews.
    The remaining 500,000 policyholders will be transferred to a
new company jointly owned by leading insurers including Generali
 GASI.MI , UnipolSai  US.MI  and Allianz  ALVG.DE . The
guarantees should encourage them to stick around. But the banks
are likely to lose money if redemptions start again once a
current freeze is lifted.
    Size-wise, Eurovita was not huge. And it’s unlikely that
much larger, more diversified players will get into trouble in
the same way. While Generali’s General Manager Marco Sesana told
an analyst call the group had experienced moderate redemptions
of certain life products distributed via banks in the first
quarter this year, the situation had already improved in April
and May. Also, Generali’s reliance on a vast agent-led network
allows it to offer customers the chance to swap to some of its
other products.
    Still, Eurovita offers a lesson. Crises can flare up in
unexpected corners. If European regulators weren’t already on
the lookout for future SVBs, they should be now.
    Follow @LJucca on Twitter
    
    CONTEXT NEWS
    Italy’s top four insurers and Germany’s Allianz have agreed
a multibillion-euro rescue deal for ailing life insurer
Eurovita, industry supervisor IVASS said on June 30.
    The accord was brokered after months of work. The deal also
involves banks that sold the insurance products through their
networks.

 (Editing by George Hay and Oliver Taslic)
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