Ghost of Silicon Valley Bank turns up in Italy

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.

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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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