Eurovita woes have shaken but not derailed Europe's closed life insurance market

Europe's market for closed life insurance business should recover from the impact of the collapse of Italian life consolidator Eurovita SpA.

Closed life book solutions such as sales and reinsurance, when well structured, remain valuable mechanisms for the European life insurance industry despite the private equity-owned company's failure in 2023, according to Luca Tres, head of Europe, Middle East and Africa strategic risk and capital life solutions at reinsurance broker Guy Carpenter & Co. LLC.

"We will likely see the market for such structures grow moving forward, especially after the current uncertainty dissipates," Tres said in written comments.

Eurovita's collapse has increased regulatory scrutiny of deals, intensified the debate about private equity's (PE) role in life insurance and may even have derailed one transaction.

Sticking points

Closed blocks have been a major focus for life insurers and their investors in recent years. Supporting these books, which often contain traditional life insurance that promises a guaranteed rate of return to policyholders, ties up significant capital.

Offloading liabilities through outright sales or reinsurance can free up money that can be used for growth elsewhere. Regulators closely watch sales of closed life books to specialist consolidators and there was hope that a history of successful deals would streamline the approval process. Eurovita's collapse, however, has upset the balance.

"The ripples… were far larger than I was expecting," said Steve Murray, CEO of London-listed life and pensions consolidator Chesnara PLC, in an interview. "Corporate finance advisers are certainly trying to figure out what the fallout is."

Outright acquisitions by prominent consolidators have slowed to a trickle in recent years, and the increased regulatory scrutiny has done little to help.

"This environment is of course having an impact on the number of transactions in the market as well as acting as a deterrent for some insurers considering these types of transactions," Tres said.

Eurovita, owned by funds operated by UK-based PE house Cinven Ltd., has shone the spotlight on PE's role in acquiring and reinsuring closed life blocks.

Viridium Group GmbH & Co. KG, another Cinven-backed consolidator, said in January that its planned acquisition of a closed German life book from Zurich Insurance Group AG had fallen through because of considerations relating to its ownership structure.

Several prominent consolidators/reinsurers are owned by or affiliated with PE companies. Traditionally, PE firms have tried to maximize returns over a short time frame, which has questioned whether their interests align with life insurance policyholders.

The chances of short-term PE funds getting approval to buy closed life insurance books in Europe is now "almost zero," said Mike Wells, CEO of life consolidator Athora, at a June conference in London.

Beyond PE

Even so, life insurance specialists say the Eurovita effect should not be overplayed.

"The fact that one insurance company runs into solvency difficulties doesn't mean that the whole market is affected," said Charles Rix, a partner at Keystone Law who advises on M&A and business transfers, in an interview.

Despite the increased focus on PE's involvement in closed life books, regulators will not necessarily single out and block PE-backed deals.

"Supervisors are now paying much greater attention to 'fit and proper' requirements in general, both in relation to shareholders and management, not just PE-based players," Tres said. "In my view, the insurance industry as a whole will benefit considerably from this."

Regulators are unlikely to turn down a reinsurance deal just because it is backed by PE, Tres added, and traditional reinsurers would not face less scrutiny than their PE peers.

"Counterparty profile is only one of the multiple factors that any regulatory assessment is based on," he said.

German financial regulator BaFin declined to comment on the termination of Viridium's planned acquisition of Zurich's closed German life business. The regulator is legally obliged to maintain confidentiality about individual companies, a spokesman said via email.

There is no difference between the regulator's approach to evaluating acquisitions by PE-backed consolidators and other transactions. However, future ownership structure is a focus of transactions with PE-backed consolidators as regulators need to ensure that new owners have "adequate business plans for the continuation and development of the business," the spokesman said.

Some PE firms are now using longer-term capital when investing in life insurance business. Blackstone Inc.'s strategic partnership with life consolidator Resolution Life Group Holdings LP, announced in 2022, envisaged the pair raising $3 billion of new equity capital for Resolution through a "perpetual capital vehicle" that would also include most of Resolution's existing investors, for example.

PE has had a "great deal of success" with life transactions where it telegraphs that it is investing for the long haul, said Richard Baddon, a partner at Deloitte specializing in insurance M&A.

Pushing forward

Despite its setback in January, Viridium intends to continue doing deals. The company, in an email, said it could have finalized the Zurich deal with a different ownership structure. "Viridium's shareholders are currently reviewing strategic options for the future ownership structure of Viridium," it said. "Simultaneously, we are already exploring possibilities for future transactions and are in initial discussions about them."

Cinven declined to comment on plans for its Viridium stake.

Chesnara, which is looking at acquisitions with considerations between £100 million and £350 million, views the market as "pretty active," Murray said, and the pipeline of deals is "looking positive." Key drivers include companies wanting to simplify their operations, trim their geographic footprints and free up capital to participate in places like the UK pensions risk transfer market.

One factor that may make some transactions more difficult is higher interest rates. Athora Holding Ltd.'s planned acquisition of a closed German life book from Axa SA fell through in May because higher interest rates had made the book of business more valuable. That said, elevated rates could foster dealmaking activity, Murray said. "The fact that interest rates aren't at zero has meant that there's certain books of business that it could be more interesting for sellers to bring to the market," he said.

With the forces driving life insurers to tackle their closed books of life business still in place, there is optimism for growth in all solutions. "We expect more activity across M&A, block sales and reinsurance solutions," Tres said. "The European insurance industry could see further consolidation and there are a number of both traditional and PE-backed players with the appetite for external growth."