Sovereign Debt to Test Eurozone Insurers

With Americans transfixed by the commemoration of 9/11 this weekend, it was easy to miss the economic ill tidings emanating from Europe.

Bloomberg notes that the possibility of a default by Greece seemed to rise over the weekend as Juergen Stark quit the European Central Bank’s (ECB) executive board on Friday over his opposition to the ECB’s purchases of bonds from debt-laden countries such as Spain and Italy. Indeed, the article cites a "growing concern about the smaller nation’s ability to repay investors."

In a research note today, A.M. Best noted that the situation in Europe "remains precarious because of the various political factors involved with resolving the crisis."

This market turbulence is presenting an increasingly challenging investment environment for European insurers and reinsurers, the note states. "Slower growth within Europe’s major economies has increased the possibility of a double-dip recession and exacerbated the sovereign debt crisis in a number of Eurozone countries—namely Portugal, Italy, Ireland, Greece and Spain," the report states.

Accordingly, the rating firm has undertaken a stress test of a representative sample of major European insurers’ exposure to sovereign debt and other investment vehicles within Europe. The tests reveal that a marked economic decline in these countries could spread to the EU as a whole and have "direct negative effect" on the "business prospects, performance and capitalization" of EU-based insurance companies. "Due to the uncertainty surrounding the situation and its potential resolution, A.M. Best believes that careful monitoring of the exposures of each credit will be important in the coming months."

Moving forward, A.M. Best says it will continue discussions with insurers on how they are managing these exposures and what risk mitigation plans they have in place. "Companies with an elevated investment risk exposure may come under pressure if the situation deteriorates further," the report states. "A worsening of the economic or investment landscape in Europe, without mitigating actions taken by company management to offset these heightened risk characteristics, could result in an increase in negative outlooks or downgrades for (rre)insurers operating in these markets."