July 23, 2024

Generali executive warns on private equity funds in insurance

Short-term funds can have misaligned interests, says finance chief, after collapse of rival insurer

The finance chief of Italy’s biggest insurer has expressed concerns about potentially conflicting interests when life insurance companies are owned by private equity funds, as anxiety grows about the consequences of a shift of ownership in the sector.

Policymakers and regulators have started paying more attention to the particular risks presented by the flood of PE investment into life insurance.

The IMF has highlighted risks such as a higher proportion of illiquid assets, and the risk of “contagion” to the wider financial sector, the Financial Times reported this month. Almost 10 per cent — $850bn — of US life insurance industry assets were owned or managed by private equity firms by the end of 2021, the IMF said.

“My view is, for sure, on the private equity fund owning [a life insurer], there is not a perfect alignment of interests,” said Cristiano Borean, chief financial officer at Generali.

He made a distinction between private capital groups that buy insurance companies as a long-term balance sheet investment, and situations where the insurer is owned through a private equity fund with a shorter time horizon.

An insurance company “needs to have the longer-term alignment”, Borean said, adding that each situation needs to be viewed on a “case-by-case basis”.

The IMF’s paper highlighted the case of Eurovita, a small Italian life insurer that was taken into special administration this year as higher interest rates on other savings products encouraged customers to cash in, or “lapse”, their insurance policies, just as the assets backing them had slumped in value.

The regulator stepped in after it emerged that Eurovita’s controlling shareholder — a fund operated by British private equity firm Cinven — was not going to provide the level of capital injection requested by the regulator. The news of Eurovita’s problems encouraged more customers to cash in, according to the Bank of Italy.

Cinven declined to comment.

The Eurovita collapse fed concerns that customers of other groups might be tempted to cash in insurance policies, creating the potential for what analysts have called a “mass lapse” event.

Generali has experienced increased lapses in Italy and France, mostly in policies sold via banks. But Borean said that Generali’s lapses in Italy began “trending down” after it was announced in June that the insurer, along with four others including Germany’s Allianz, had struck a rescue deal to create a company to house Eurovita’s life insurance policies.

A trading update on Friday showed Generali suffered a net outflow of €8.7bn from savings products over the first nine months of the year. That was mostly offset by inflows into other areas such as unit-linked savings products, leaving a €1.1bn net outflow from the life division.

Overall, the group posted a €5.1bn operating profit for the period, up 17 per cent on the same period last year, with profitability improving at its property and casualty division despite losses from European floods. Generali was “resilient” to some of the ill-effects of higher interest rates, benefiting from diversification across business lines, Borean said.

But the group’s outlook statement warned that given “mixed data regarding labour markets, combined with softer demand, there are more signs of a possible slowdown of the global economy, which may affect the insurance sector”.

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