Primary market most exposed to eurozone’s increasing woes-AM Best

With the eurozone showing signs of dropping into a double dip recession and even powerhouse Germany expected to fall into recession later this year, AM Best said during its press briefing at the Monte Carlo Rendez-Vous that the bleak macro picture is inevitably taking its toll on the balance sheets of insurance companies. The rating agency was keen to stress that although the entire risk transfer industry is under threat from the crisis, primary insurers are clearly more exposed with reinsurers having done a better job of shedding their exposures. As a result of the financial troubles the rating agency has already downgraded a number of primary ratings this year. It believes investment exposures to peripheral eurozone sovereign debt and financial institutions are on par with catastrophe exposure as the greatest current risk to balance sheets.hideStefan Holzberger, Managing Director – Analytics at AM Best, said figures suggest the eurozone is entering into a double dip recession, which does not bode well for the insurance industry. Whilst most economic indicators suggest that other regions around the world have bounced back from the financial crisis, unemployment, along with rising government bond yields and falling gross domestic product figures, particularly in Italy and Spain, suggest a far less rosy picture for the eurozone, he continued. He also believes that a Greek exit from the euro is more likely than not in 2013. “I don't want to say it is inevitable but there is a much stronger force for this occurring than in the other direction,” he said. “The probability of a Greek exit is still greater than 50% and markets seem to agree and appear to have little faith that recent actions at EC level will lead to a solution,” he added. All insurers are facing pressure as a result of the troubles in the eurozone, he went on. The bleak macro economic picture means that overall conditions are not good for the risk transfer industry in terms of both earnings and top line growth, said the AM Best man. But the most significant threat is to balance sheets, he added. Primary insurers have the ‘lions share’ of exposure to the crisis and exhibit the biggest dip in risk-adjusted capital under AM Best stress tests, explained Mr Holzberger. Around forty to fifty entities at ten to fifteen large insurance groups have a particularly high exposure to the crisis, and potentially not enough capital to meet obligations, according to the stress test. These primarily have high or exclusive exposure to peripheral eurozone sovereign debt and other investments. “Negative ratings have been taken by AMB on several European credits. Downgrades attributed primarily to companies’ exposures to Italian and Spanish sovereign debt and eurozone FI,” said Mr Holzberger. AM Best expects more negative rating action than positive over the next few years as a result of the crisis. But the rating agency also noted that despite balance sheet concerns, widespread downgrades at primary level have been averted by strong operating fundamentals at most companies. “In the context of extreme global catastrophe losses in 2011, reported earnings were robust, and remain this far in 2011. Further negative rating actions have largely been largely staved off due to the strong operating fundamentals of these companies,” said Mr Holzberger.

Primary market most exposed to eurozone’s increasing woes-AM Best

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