Insurers' balance sheets at risk from eurozone fallout

European insurers’ balance sheets could come under “severe” pressure from the write-down of a large European country’s sovereign debt or the exit of a member state from the eurozone, AM Best has warned.

AM Best’s associate director Sam Dobbyn said: “AM Best’s greatest concern for European primary insurers is the sudden impact macroeconomic conditions can have on an insurer’s balance sheet.

“Scenarios that could place a company under severe pressure include the write-down of a large European country’s sovereign debt, or the exit of a current member of the eurozone and the expected contagion effects of such an action.

“AM Best currently believes both of these scenarios are unlikely, but they could have extremely damaging consequences for the sector if they were to occur.”

AM Best’s latest report, European Non-Life Sector Faces Further Economic Uncertainty, revealed that the eurozone financial crisis continued to be one of the most significant challenges facing insurers, despite European primary insurers holding strong capital levels.

In the report, the ratings agency revealed the results of two stress tests carried out all eurozone domiciled (re)insurers with significant operations in the region in December 2011 and June 2012.

AM Best said it retained its negative view on the European insurance sector, as structural issues of the eurozone do not appear likely to be resolved anytime soon.

AM Best managing director analytics Stefan Holzberger said: “Despite balance sheet concerns, operating fundamentals for most companies remain strong. In the context of extreme global catastrophe losses in 2011, reported earnings were robust and have remained so in 2012.

“Primary European insurers appear able to withstand a significant amount of continued deterioration and volatility, although if conditions were to worsen to a level beyond stress test assumptions, further negative rating actions may be necessary.”

The report found that European insurers were attempting to increase rates where possible, while underwriting margins were passable based on current pricing. Reserving levels also showed stability, with modest reverse releases benefiting returns.