What happened to Eurovita
Let’s start with the known facts. Eurovita Spa and Eurovita Holding SpA communicated that from 31 January 2023 IVASS (the insurance supervisory institute) temporarily suspended the activity of the respective boards of directors and of the boards of statutory auditors and appointed Dr. Alessandro Santoliquido as commissioner for interim management. The first consequence concerns i 353 thousand savers that at least until the end of March they will not be able to exercise the surrenders regulated by the class I insurance contracts stipulated with the group. We are talking about 353,000 life policy subscribers who are wondering about the origin of the “problems” and what could happen.
We see. For several months, IVASS has asked Cinwenthe private equity fund that controls Eurovita, to proceed with a capital increase of 250 million. Reasons? Among others, the need to re-establish an adequate strength index. Today, the solvency ratio fluctuates around the threshold of 100 and, according to interest rate dynamics, it should also go below this threshold. While the limit minimum solvency expected by the company is equal to 150%.
Not only. The situation worsened when Eurovita communicated that following the non-approval by Ivass of the recovery plan it is forced – in light of the equity position of the Company in line with current legislation – to postpone the payment of the coupon of the Tier 2 subordinated loan maturing on February 21, 2030. In short, the risk that the situation could precipitate in an avalanche becomes higher day after day.
The origins of the collapse
But perhaps not everyone is clear what the origin of the instability is. The mechanism works like this: the assets collected by the distributors of Eurovita policies that can be revalued through agreements with various credit institutions, consultants, financial advisors, etc. are invested in the so-called Separate Management. Basically, the premiums collected by class I, capitalization and multi-class life policies subject to revaluation (combination of class III and class I) are invested in a container that includes government securities, bonds, shares, investment fund units, etc. which are defined as Separate Management because the invested assets belong only and exclusively to the customers who have subscribed the policies that can be revalued and are separated from the company’s assets.
Regulation no. 24 of 6 June 2016, issued by IVASS, precisely defines the provisions on investments and assets covering technical reserves and in article 7 of the same Regulation – in terms of “Liquidity risk management policy” – establishes among other things that the liquidity risk management policy must indicate the level of liquid assets and the description of their monitoring including the quantification of potential costs or financial losses deriving from a forced realization. Which in the case of Eurovita has not happened.
The savings of the policyholders that flowed into Eurovita’s separate management were invested (in part) in illiquid assets such as shares of unlisted cooperative banks and cooperative banks, structured bank bonds and illiquid investment funds. The effective quantification of the value of these illiquid products, for which there are difficulties in disinvesting, determine obstacles or limitations for disinvestments within a reasonable period of time, therefore one of the problems that the Commissioner of Eurovita will have to solve by 31 March will be precisely that of quantify the illiquid assets held in the various Separate Accounts.
The “system” solution and the risks for Eurovita savers
Time is running out and policyholders are worried. The insurance system, that of bancassurance, the networks of financial advisors and credit institutions cannot afford to cause not only a three hundred and sixty degree risk of contagion, but a reputational risk for the whole system. Therefore, it is urgent to identify a buyer, or find a “system” solution to restore confidence in savers, also because a further risk could derive from a possible reduction in liquidity deriving from new subscriptions to life insurance policies.
There could therefore be a risk of surrenders for the entire system, but above all for Eurovita. Because in this particular market moment, due to illiquid products, but above all due to securities devalued due to the rise in interest rates, further losses could arise in a company that is already low in capital.