Disorderly exit could have a ‘materially negative impact’ on ratings

The European insurance sector should be able to absorb shocks arising from a hypothetical Greek exit from the euro, provided such an exit were orderly, rating agency Fitch said in a new report.

Fitch said it recognises that the results of the 17 June Greek election lessen the risk of a short-term exit but believes that Greece remains under significant financial pressures, and does not rule out the possibility of an ultimate exit.

“Most major European insurers have negligible direct exposure to the sovereign debt of Greece - typically less than 1% of shareholders’ equity,” Fitch’s head of EMEA insurance Chris Waterman said.

But he added: “A disorderly Greek exit could have a materially negative impact on the ratings of European insurers, with contagion hitting credit quality and asset values, leading to a squeeze on insurers’ capital.”

The rating agency believes there are factors that might alleviate the impact of falling asset values on insurance companies in the event of a Greek exit.

“Regulators could relax the rules for assessing regulatory capital if widespread falls in the market values of financial assets threatened insurers’ solvency positions,” Fitch senior insurance director David Prowse said.

“An important additional factor for life insurers is their ability to pass certain investment losses on to their policyholders,” he added. “However, any respite from regulatory relaxation and loss-sharing with policyholders could be highly constrained in the event of severe investment losses, because of the need for insurers to meet certain minimum investment guarantees to policyholders.”

Insurance companies’ large holdings of sovereign debt make them vulnerable to any deterioration in the credit quality, market value or liquidity of these securities. Fitch said it takes sovereign downgrades into account when reviewing the ratings of insurers. Insurers could also be at risk of downgrades if a meaningful portion of their bank debt securities holdings were downgraded, the rating agency added.