Though some saw profits eroded by write-downs on Greek debt and more losses may emerge if the crisis spread to Italy and Spain, European insurers and reinsurers have so far escaped a major hit from the euro-zone crisis.
"The volatility of financial markets in the wake of recent sovereign debt issues remains a concern," Swiss Re warned, even as the Zurich-based reinsurer said it had reduced its exposure to peripheral euro-zone countries to $78 million by the end of the second quarter.
Mirroring developments during the U.S. mortgage crisis, which insurance companies survived far better than banks, the sector appears to be sufficiently capitalized to absorb losses from its exposure to highly indebted euro-zone countries. But profits are a different story.
Many insurers have gradually reduced their exposure to peripheral European states over the past two years. They are valuing bonds at market prices, meaning that the value of the bonds they hold has already diminished as yields on Italian and Spanish debt increased.
Little of that has made its way through to income statements because insurers don't need to recognize unrealized losses as long as there's a chance the value of these investments could recover.
Losses for Europe's insurers could thus deepen if it became necessary to reach similar financing agreements with Italy and Spain as were reached with the government of Greece. The recently signed financing pact with Greece will reduce the value of Greek debt holdings to around 80% of the par value, the Institute of International Finance estimates.
The formal nature of the Greek rescue package forces insurers to recognize the losses on their bond holdings in their income statements. No such agreement has been necessary yet for Italy and Spain. If it were to happen, the impact would be significant for those, like Munich Re and AXA SA, which have a considerably higher exposure to these two countries than to Greece. That's because what they are currently carrying as unrealized losses—which are reflected only in the balance sheet but not in the income statement—would become realized losses and hit the companies' earnings.
"In view of the planned participation of private creditors in a second rescue package for Greece, we have written down the value of these [Greek] securities by €703 million ($1.01 billion) to the market value [of €800 million] as at 30 June 2011," Munich Re said in a statement to detail second-quarter earnings. Munich Re owns Italian government bonds with a market value of €5.3 billion, while its Spanish sovereign debt has a market value of €2 billion.
In Paris, AXA, took a €92 million impairment charge to reflect the impact on the value of its bond holdings from its participation in the rescue package. The French insurer made the adjustment on bonds that will expire over the next nine years, saying it wasn't necessary yet to recognize losses of bonds that need to be paid back after 2020.
AXA owns Italian government bonds with a market value of €17.1 billion, while its Spanish sovereign debt has a market value of €10.2 billion. The market value of all its Greek holdings now stands at €766 million.
Some insurers, including most in the U.K. and Swiss Re in Zurich, already have reduced their holdings in Spanish, Italian, Irish and Portuguese bonds. Swiss Re has only $78 million left in bonds from these so-called peripheral euro-zone countries, down from $324 million at the end of the first quarter. London insurer Catlin Group Ltd. doesn't have any investments in European sovereign debt.
"Most people in London have kept out of it," Catlin Chief Executive Stephen Catlin said. "Those property-and-casualty companies that have sovereign debt are going to have to take a hair cut."