Insurers can cope with peripheral eurozone woes

Most rated European insurers could sustain a potential further weakening in the creditworthiness of the Irish and Portuguese governments, but not of those of Spain and Italy, according to Moody’s.

In a report issued in Paris today, the agency says the rated European insurers’ modest direct exposures to Ireland, Portugal and Greece means that deteriorations in the creditworthiness of the three most troubled sovereign credits will have a minimal direct impact.

Rated insurers also have low exposure to banks and corporate issuers domiciled in these three countries, relative to their capital, according to the agency.  

In addition, as most rated European insurers generate only a small portion of their revenues in Greece, Ireland and Portugal, their vulnerability to a weakening operating environment in those countries, often coinciding with sovereign credit deterioration, is limited.

Insurers could also cope with higher-than-expected losses on Greek sovereign debt, judges Moody’s.

Even if a credit deterioration in Greece, Ireland and Portugal was coupled with a modest credit weakening of other peripheral EU sovereigns and all European banks, the direct impact on most European insurers would remain limited, it says.  

However, the credit profiles and ratings of many European insurers would be affected if Spain and Italy experienced a significant credit deterioration as a result of a widening of the EU sovereign debt crisis.

The report says European insurers would be vulnerable in a severe stress scenario of a wider EU sovereign crisis, implying significant credit deterioration of Spain and Italy. This is because insurers have higher levels of exposure to these countries.

Moody’s Assistant Vice President and author of the report Benjamin Serra said: “We believe that a theoretical default scenario in the case of Portugal and Ireland, or a further debt write-down or restructuring in the case of Greece, would not have a direct material impact on rated European insurers’ financial positions.”