by Simone Borgo
Eurovita continues to leap to the headlines, after IVASS has decided to freeze the redemptions of the policies in an attempt to stem the flight of customers until 31 March 2023 due to a possible landslide of the capital. Yesterday’s news that the insurance company received a first important contribution from the shareholder Flavia HoldCo Limited (an entity belonging to the private equity fund Civenmajority shareholder of the company) equal to 100 million euros.
Meanwhile, Commissioner Santoliquido is proceeding with the activities aimed at seeking further solutions aimed at strengthening the capital of Eurovita, which currently has a solvency ratio below 150%, the tolerance threshold of the supervisory authorities. For the recapitalization Ivass has therefore asked 200 million eurostherefore with the contribution announced yesterday of 100 million we can say that we are halfway there.
But what puts savers on alert is not so much Eurovita’s financial situation, but rather what could be the fate of the policies underwrittenhowever, they are not all the same.
Separate management
Separate management (GS) is a particular financial management, specifically created by the insurance company, in which the capital of customers who subscribe to a traditional life insurance policy. This type of product is generally defined as “Branch I”.
In practice, it is a assets separate from the company: therefore, whatever happens, no one will be able to touch the GS capitals. In other words, the money that makes them up it can only be cashed out by customers who have invested in it.
The separately managed assets are invested in securities which, as long as they remain within the policy and are not sold, are valued at the price at which they were initially purchased (the so-called “historical value” accounting criterion). Let’s take an example: if a Branch I policy purchases a security for €1,000, this security will be valued at €1,000 until it is sold, even if the real “market value” of the security fluctuates.
Watch out for that though it doesn’t always stay at the same value, as it might appear. The value changes thanks to the returns (for example, the collected coupons) that are generated by the securities in the portfolio and which increase the value. Even at the time of sale there could be a fluctuation in the value of the security: the difference between the purchase price and the sale price will be transferred to the value of the GS, generating a gain or a loss.
Returning therefore to the Eurovita case, in the event of bankruptcy what could happen to our Branch I policies? The assets of the GS would not be included in the bankruptcy, but would be liquidated at the market prices of the securities in the portfolio and the guarantee of the repayment of 100% of the paid-in capital would lapse.
Internal insurance funds
The scenario is different if savers have subscribed to the internal insurance funds (FIA) that make up the multi-branch insurance policies (generally defined as “Branch III”).
Branch III policies consist of separate management and internal insurance funds. For the first component, everything would be considered as for the Branch I policies we have just discussed. For the second component instead there would be no guarantee whatsoever if not that of a market valuation as for a normal investment fund.
FIAs are indeed real ones mutual funds, while sometimes they can be SICAVs, i.e. companies with variable capital. Unlike other types, unit-linked policies invest in insurance funds, but otherwise their functioning is not so different.
It is a very common financial product because it is offered to the customers of many banks and is therefore not confined to a small circle of investors. The raising of capital by the insurance funds takes place thanks to the signing of new unit-linked life policies and not separate management. FIAs can fall into the category of managed savings, in fact the buying and selling of shares in their portfolio is managed by an asset management company, an acronym that stands for “asset management company”.
Returning to the Eurovita case, in the event of bankruptcy on the sums to be repaid whether Branch I or Branch III hangs the sword of Damocles of the interest rate hikes by central banks. Such increases could generate falls in the prices of the securities proportional to the duration of the securities themselves. Each FIA and each GS could have completely different portfolios, with values and assets that will be evaluated at the time of any liquidation.
In short, a situation to be defined and which cannot in any way be considered a priori without knowing the condition and the choices made by the managers. In case of compulsory administrative liquidationthe savers involved will be supported by the policy liquidator for the evaluation of the sums that will be returned to them.
