Lenders including Natwest Group Plc, ING Groep NV, Bank of America Corp. and BNP Paribas SA are in the process of writing down about $300 million in loans to Eurovita after an Italian regulator suspended management and halted redemptions at the life insurer, people with knowledge of the matter said.
(Bloomberg) — Lenders including Natwest Group Plc, ING Groep NV, Bank of America Corp. and BNP Paribas SA are in the process of writing down about $300 million in loans to Eurovita after an Italian regulator suspended management and halted redemptions at the life insurer, people with knowledge of the matter said.
The decision by Italy’s Institute for the Supervision of Insurance has pushed Cinven, the UK buyout firm that owns Eurovita, into the spotlight and highlights concerns among regulators and banks about private equity’s ownership model when it comes to companies offering financial products to retail customers.
The troubles began last year, when bond market volatility and a surge in customers seeking to pull money from Eurovita hit the insurer’s solvency ratio, according to the people. A so-called lapse rate cushion is used by insurers to minimize the risk of cash flow problems if clients cancel policies early.
The reduction of the firm’s solvency ratios prompted the regulator, known as Ivass, to ask Eurovita to raise as much as €200 million ($214 million). Cinven is still weighing an injection of capital, the people said, asking not to be identified discussing confidential information.
It’s a cautionary tale for private equity firms that bought life insurers or their back books in recent years, betting they could boost returns by changing investment strategies, using more leverage and lowering unit costs.
Ivass took the step of putting Eurovita into temporary administration. An appointed commissioner was given two months from Jan. 31 to find a solution and one of their first moves was to freeze redemptions, meaning mom-and-pop customers can’t access their savings at present.
“Cinven is engaged in constructive discussions with the commissioner of Eurovita and its own advisers in order to find a stable and long-term solution for the business and its stakeholders,” a spokesperson for Cinven said, declining to comment further.
Spokespeople for Bank of America, BNP Paribas, ING, NatWest and Ivass declined to comment.
Failed Sales
For Cinven, the request for more capital at Eurovita is an extra headache after two unsuccessful attempts to sell the troubled life insurer in recent years.
Previous owner JC Flowers offered to buy Eurovita back for €1 on the condition Cinven re-capitalized the business but the talks ended without agreement, according to the people. Cinven later tried to get Singaporean sovereign wealth fund GIC Pte to co-invest capital in the Milan-based business, they said.
These failed attempts left Cinven with a debt load with a face value of more than $300 million from eight banks, according to the people. Those lenders have now begun recognizing losses on the credit or are moving toward doing so, they said.
Eurovita, which manages about €19 billion in assets, has also suspended interest payments on a bond with a face value of €115 million, citing a “regulatory deficiency.”
A representative for GIC couldn’t be reached for comment outside of normal business hours in Singapore, while a spokesperson for JC Flowers didn’t immediately respond to requests for comment.
Planned Expansion
This all contrasts with the early performance of Eurovita under Cinven’s ownership. After buying the insurer in 2017, the private equity firm merged it with other portfolio companies, including the Italian division of Old Mutual Wealth, to create a platform of life insurance products.
Returns were positive before the end of cheap money led to last year’s volatility, according to people with knowledge of the matter. Cinven also paid out dividends to itself throughout the investment cycle, they said.
The turmoil also deals a blow to Cinven’s ambitions of playing a bigger role in expanding financial services companies in Europe. It’s become a key investor in the space under partner Caspar Berendsen, taking stakes in the likes of Viridium, a back-book consolidation platform in Germany, and insurer International Financial Group Ltd.
Last year, Cinven raised €1.5 billion for a dedicated fund targeting investments in the financial services industry, including in life insurers.
Retail Protection
Some bankers in Europe now expect regulators to look more closely at the leverage multiples applied by private equity firms acquiring regulated entities, to ensure retail customers are protected.
“The Eurovita saga is the proverbial canary in the mine shaft, as many private equity investors and regulators across Europe are trying to figure whether non-listed assets with substantial retail exposure are a no-go,” said Francesco Galietti, founder of Rome-based political risk consultancy Policy Sonar.
Galietti said a worst-case scenario for private equity firms would be if regulators started applying stricter rules to the buyout industry. “Reputation-wise it would taint other deals in this space.”
–With assistance from Vinicy Chan.
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