Previous eurozone optimism was a ‘false dawn’ – trouble is far from over for AXA, Allianz, Aviva

Just when it looked like the cloud of eurozone concerns was lifting, along comes another bombshell to send the stocks of Europe’s biggest insurers tumbling.

Despite optimism about improvements in the eurozone in the first quarter of this year, stocks in AXA, Allianz and Aviva fell sharply yesterday, amid fears that Spain – one of the so-called ‘peripheral eurozone economies’ – might require a bailout.

These companies suffer when there is bad news about the eurozone because, thanks to their strong European standing, their life and investment arms in particular are heavily exposed to eurozone countries’ government bonds.

This includes those countries deemed most at risk of default: Italy, Spain, Greece, Portugal and Ireland.

If one of these countries default, insurers stand to lose a lot of money because of the resulting devaluation of the bonds they hold. If all five go, this could spell big trouble.

Swiss Re estimated last year that such an event could cost the European insurance industry as a whole €143bn (£118bn) – 24% of the market’s combined shareholders’ equity.

While there may be fluctuations in sentiment about the health of the eurozone, this theme is going to run and run. Speaking at a press conference today, reinsurance broker Aon Benfield’s head of international market analysis Mike Van Slooten described the relative optimism at the beginning of the year as a “false dawn”.

“None of us should be fooled into thinking this has gone away. The structural issues are still out there and it is still going to play out over time,” he said.

The eurozone debt crisis could be dismissed as a life insurance issue – RSA, for example, has comparatively small eurozone exposure of £138m as at the end of last year. But large investment losses on eurozone bonds could have serious implications for affected companies’ general insurance businesses. Any resulting rating downgrades below the all-important A- point, for example, could make it difficult for a company to write commercial insurance.

In addition, this is not just about direct exposure. If a country defaults or, in a worst-case scenario, the eurozone collapses, the effect on the economy could make life difficult for all companies.

Neither is the problem confined to Europe. A recent study by Aon Benfield has shown, for example, that global reinsurers’ eurozone exposure is negligible thanks to the spread of business they write and their efforts at ridding themselves of problem bonds.

But Van Slooten said this morning: “The eurozone crisis, if it goes wrong, has the potential to cause a lot of chaos in the capital markets generally, which will make life difficult for these companies.”

Will Towergate do the right thing?

The market is full of talk over Towergate’s interest in buying broking group Cobra. Some members of Cobra Network have voiced concerns about such an acquisition because Towergate currently competes with them.

Towergate is no stranger to buying and integrating brokers and networks, having purchased Broker Network in 2007. As such, it is well placed to make sure a deal works for all involved, and would likely be keen to avoid any in-fighting and feelings of disenfranchisement.

However, Towergate would also be unwise to dismiss the perfectly understandable concerns of the network members. Mark Hodges will need to clearly explain the benefits and aims of the acquisition to allay these fears.