US/EUROPE - Life insurers on both sides of the Atlantic are coming under pressure in the wake of falling stock markets and corporate bond defaults.
In the US Moody’s has calculated that US life assurers have US$23bn of exposure to companies that have recently defaulted or are now experiencing credit problems.
“Insurers holding these bonds have and will continue to experience economic losses on their portfolios which in some cases could be meaningful where the aggregate holdings are substantial,” said Robert Riegel, managing director for life insurance at Moody’s.
Moody’s has calculated the extent of life insurers’ exposure to 10 troubled credits including WorldCom (US$5.3bn), Qwest (US$4.5bn) Enron (US$3.8bn) Tyco (US$2.4bn) and Xerox (US$500m). The life assurers with the biggest exposure are AIG (US$1.8bn) Metlife (US$1.4bn), Aegon USA (US$1.4bn) and Prudential Financial (US$1.3bn). Nine other groups have exposure to the same companies of between US$500m and US$1bn.
The report says that because insurers have widely diversified portfolios, the performance of a single credit even for a large borrower like WorldCom should not greatly affect an insurer’s overall creditworthiness.
However, it goes on to say: “The total exposure of certain insurers to these 10 credits is quite substantial in several cases. In certain cases this is due to a large exposure to a single credit.”
Moody’s believes the eventual credit losses incurred could be substantial: “Our best estimate is that on an after-tax and recovery basis, many insurers could lose about 25%-50% of their investments in these credits.”
Moody’s expects that downgrades of US life insurers are likely to become more common if credit losses continue.
In Germany poor investment returns for German life insurers have raised fears that some insurance companies will be unable to meet their end of year payouts amounting to an annual guaranteed return of 3.25%. The German insurance association, the GDV, and the financial services regulator, BAFin, have reached an agreement to set up a company to manage the contracts of companies which find themselves in difficulties in meeting their commitments. Details are still to be worked out but the arrangements are likely to involve the participation of the major insurers.
Rumours are rife of up to 25 companies being in trouble, but a spokeswoman for the GDV dismissed the rumours.
“Life insurance has a mixture of different investments and only a few investments in shares, but the public doesn’t know it,” she said.
She added that insurers had an “image problem” and the proposed measures were needed purely to reassure the public that in the event of one company being in trouble the others would step in to help.
*Standard & Poor’s has cuts its long- and short-term ratings rating for Switzerland-based Zurich Financial Services , and placed the group on single-'A'-plus/'A-1' from double-'A'-minus/'A-1'.
The move follows ZFS' plan to increase its net non-life reserves by US$2bn, write down asset values by US$1bn, and incur restructuring charges of US$0.5bn by the end of the year.
The firm posted 1H pre-tax losses of US$2bn and announced around 4, 500 job cuts. ZFS also said it would launch a rights issue of US$2bn by October.
If the rights issue were not successfully completed, however, [we] would lower the ratings further, said S&P.
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