Fitch Ratings says the majority of European insurance companies have manageable exposure to Greek government bonds and therefore would not be downgraded if they accept the EU's offer of a 50% haircut in return for new debt.
Some French life insurance companies are a notable exception. They have significant exposure to southern European government bonds, and we expect reduced profits as a consequence of impairments taken on Greece and possibly other countries. Although the French life insurance sector as whole is on Outlook Negative, exposure varies considerably between insurers. The threat to their profitability is not all from assets. Financial market volatility has put pressure on sales of unit-linked policies, which tend to be more profitable and less capital intensive.
Fitch first tested the impact of a Greek default on insurance companies in August 2010. All insurers in its rated portfolio could withstand a loss of 70% on Greek government bonds and the impact from adverse changes to mark-to-market movements in other sovereign bonds. Most insurers are in a stronger position now than they were then and many have reduced their exposure to Greek government bonds.
UK, German and Italian insurers typically have minimal direct exposure to Greek sovereign debt. UK and German insurers have also improved their risk profile. They have limited exposure to debt in Ireland, Portugal, Spain and Italy and have reduced their exposure to equities. The UK life sector reported strong results for 2010 and H111, with larger regulatory capital surpluses and prudent credit default provisions.
The net loss that life insurance companies will take as a result of a Greek government default could be considerably lower than the gross amount of debt the company holds. Life insurers could pass a large proportion of the losses to policyholders. The exact amount depends on the jurisdiction, type of products and the company's investment return in excess of the minimum guarantees if offers its clients. This further insulates insurers' credit profiles from a sovereign default.
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