Like major European banks (Euro Bank Sovereign Debt Exposure Final - Pro & Institutional and Euro Bank Soveregn Debt Exposure Final -Retail), key European insurers and reinsurers have an unexpected level of exposure to the sovereign debt of troubled PIIGS countries, thus running a risk of significant write-downs as spreads continue to widen and the probability of default rises (please reference “With the Euro Disintegrating, You Can Calculate Your Haircuts Here” for an analytical look at prospective PIIGS debt haircuts).
Moreover, as the contagion effect of this risk spreads across the entire EU, the sovereign debt risk of EU countries is continuously increasing, further worsening the expected loss scenarios. Reference the complete Pan-European (soon to be Global) Sovereign Debt Crisis series for more information as well as subscription content detailing deficit projections and potential haircuts.
To support the conclusion above, we have analyzed the net exposure of 11 insurance companies to the PIIGS members as well as other pertinent European countries. A point to note before the exposure of insurance companies is analyzed is that shareholders’ exposure to the total investment portfolio for insurance companies is generally limited due to participation of policyholders, and thus we are analyzing the net exposure, which is the exposure of the shareholders (i.e. gross exposure minus share of minorities, taxes and policyholders). The share of net exposure is generally lower in case of life insurance companies, while it is higher for general (i.e. non-life) insurance companies.