Generali Faces Challenges in Shedding €20 Billion Insurance Liabilities Amidst Rising Interest Rates

Italian insurer Assicurazioni Generali (GASI.MI) has encountered obstacles in its plans to divest up to €20 billion ($21.87 billion) of insurance liabilities as a surge in interest rates has complicated negotiations with potential buyers. Generali, in collaboration with Goldman Sachs (GS.N), initiated the process in late 2022 to sell a substantial portfolio of domestic life insurance contracts in order to free up capital. However, the recent increase in interest rates has raised concerns about the portfolio’s value and regulatory approval for transferring such a significant amount of risk to buyout groups.

Interest Rate Complications and Potential Buyers:

The surge in interest rates has added complexity to the deal, creating uncertainty regarding the portfolio’s worth and the regulatory willingness to authorize a large risk transfer to buyout groups. Despite this, Generali has been in discussions with potential buyers, including GamaLife (backed by Apax Partners), Athora (backed by Apollo Global Management), and MedVida (owned by Paul Singer’s hedge fund Elliott Management). These interested parties have shown various degrees of engagement in acquiring the portfolio, which consists of different clusters of policies.

Generali’s Focus and Alternative Solutions:

Generali’s attention was temporarily diverted by its recent agreement to acquire Liberty Mutual’s European operations for €2.3 billion. As a result, the insurer may seek to revive discussions with potential buyers once this acquisition is finalized. Nevertheless, Generali remains open to alternative arrangements for outsourcing the risk, such as exploring reinsurance options.

No Comment from Involved Parties:

When approached for comment, Generali, Goldman Sachs, Apax Partners, Athora, and Elliott Management declined to provide any information. Similarly, spokespeople for Apollo, GamaLife, and MedVida did not respond to the request for comment.

The Significance of Closed or Run-off Insurance Books:

Closed or run-off insurance books comprise policies that are no longer sold to new customers but are still active, necessitating insurers to hold capital for future obligations. Traditional insurance companies have been separating these legacy portfolios to unlock capital and reallocate it elsewhere. On the other hand, private equity funds have established consolidation platforms to acquire these unwanted policies and implement effective management strategies, leveraging their expertise in asset management to generate higher investment returns.

Impact of Rising Interest Rates and Regulatory Scrutiny:

The recent escalation of interest rates across Western countries has made it financially advantageous for insurers to retain old insurance savings contracts, as the relative yields they pay to customers become less compared to other investments. However, the shift in the rate cycle has prompted some policyholders, particularly in Italy, to withdraw their funds prematurely to invest in higher-yielding products. This has placed significant pressure on the insurance sector, resulting in the failure of Eurovita, a midsize insurer owned by buyout house Cinven. While Eurovita is considered an outlier by rating agencies, this case has heightened regulatory scrutiny in the sector and led to a slowdown in deal-making.

Conclusion:

Generali’s plans to shed up to €20 billion of insurance liabilities have been complicated by the recent surge in interest rates, posing challenges in negotiations with potential buyers. The insurer may reconsider discussions after completing the acquisition of Liberty Mutual’s European operations. Additionally, Generali remains open to alternative solutions, including reinsurance arrangements, to manage the associated risks. The rise in interest rates has had mixed implications for the insurance sector, leading to the increased affordability of maintaining old insurance contracts for insurers but also prompting early withdrawals by policyholders seeking higher returns. The failure of Eurovita has drawn regulatory attention, resulting in a slowdown in deal-making within the industry.