Sovereign debt exposure of Insurers and Reinsurers

Wednesday, 19 May 2010 06:50

Sovereign debt exposure of Insurers and Reinsurers

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Taking into consideration Merkel's ill-conceived ban on financial company shorts, I feel this is a good time to review alternate exposures to concentrations of European sovereign debt exposure. Before we go, please reference the effects of this ban announcement as expressed in the mainstream media:

Keep in mind that all investors are speculators since no return is a "sure thing" and furthermore prudent speculators don't short healthy nor strong prospects. The ban on financial company shorts is akin to a ban on calling a horrible smelling person stinky, it really doesn't make them smell any better. As a matter of fact, it very well may draw additional and more detrimental attention to the odor. The best way to deal with both legal (at least what used to be) shorting and being called stinky is to address to address the root causes of the problem. Personal hygiene in the case of "stinky" and fiscal hygiene (ex. fixing those balance sheet and transparency issues) in the case of financial companies.

With that being said, I would like to offer an excerpt of a recently released subscriber report that may be of interest to those following the European crisis. Subscribers may access this document here File Icon Sovereign Debt Exposure of European Insurers and Reinsurers and professional and institutional subscribers may access the live spreadsheet behind the document by clicking here.

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.