Insurers express concern that Greek eurozone exit could cause currency to collapse
The escalating crisis in the eurozone has led Lloyd’s chief executive Richard Ward to admit that preparations are underway to deal with a collapse in the euro currency.
The revelation comes in a week when it emerged that Aviva was planning to sell its Asian businesses to bolster capital against headwinds from Europe and rating agency Fitch warned of a threat of Greek contagion to Italian and Spanish insurers.
Ward is concerned that a Greek exit could trigger a collapse in the euro, leading to writedowns on its £58.9bn investment portfolio. Lloyd’s also writes 18% of its £23.5bn GWP in Europe.
“We’ve got multi-currency functionality and we would switch to multi-currency settlement if the Greeks abandoned the euro and started using the drachma again,” Ward said in reports this week.
“It’s more about what would happen on asset writedowns and what would happen to existing policies. They would not necessarily have to be moved to a new currency but it would be about how you would agree to nominate existing policies if the euro collapsed.”
Meanwhile, it emerged this week that Aviva is planning to sell its South Korean and Sri Lankan businesses to strengthen capital against euro troubles and the recession.
‘It would be about how you would agree to nominate existing policies if the euro collapsed’
Richard Ward, Lloyd’s
Aviva has credit risk in the form of corporate and government bonds, and equity stakes in other companies, which have either suffered volatility or deterioration in the wake of the eurozone crisis and downturn.
Aviva’s solvency surplus finished the first quarter at £3.2bn, compared to £2.2bn from year-end 2011. However, interim executive chairman John McFarlane is keen to further strengthen Aviva’s capital base.
The US life business is currently on the auction block. Aviva has progressively also sold stakes in Delta Lloyd and completed the sale of roadside rescue firm RAC to private equity for £1bn last year.
As well as the potential deterioration of its capital base, the recession has caused life insurance sales to plummet in Italy and Spain.
These two countries were under the spotlight this week as Fitch warned that insurance industries there were at risk of contagion from the Greek euro exit.
Fitch said the event would likely trigger rating downgrades of Italian and Spanish insurers. It added that UK and German insurers were well insulated from problems on the periphery, barring Allianz and Aviva, which have significant exposures to Italian sovereign debt as they have subsidiary operating companies there.
Pass notes: Euro crisis
What could be the consequences for insurers of a Greek exit from the euro?
Some believe it is priced into markets, including insurers’ stock price, and contagion can be contained. Others believe the contagion would trigger a collapse in the value of the euro and bank runs across southern Europe, eventually leading to writedowns for insurers.
What are insurers doing to prepare for a Greek exit?
Insurers have already reduced their Greek sovereign debt exposures or taken losses on the bonds they hold. However, it is difficult for insurers to scale back their portfolios of sovereign debt when they have subsidiaries in southern Europe.
Are markets over-reacting to eurozone threats?
Aviva’s share price is trading at a three-year low, yet it maintains top-tier ratings with the agencies and is bolstering its solvency through sales. Allianz also has significant exposure in Italy, but it is counter-balanced to some extent by its holdings in German sovereign debt.