SpotLight: The impact of the war in Ukraine on European Insurers
Russia’s invasion of Ukraine is a tragic humanitarian catastrophe whose geopolitical, humanitarian and international legal dimensions are far more significant than the economic dimension of the conflict. As we describe in this Spotlight, the impact on European Insurers remains manageable.
Rötger Franz, Partner, Plenum Investments Ltd.
Strong Solvency Positions
Insurers went into this crisis with strong Solvency II positions. In fact, many issuers announced or continued share buyback programs and high dividends, the former being the first line of defence should fundamentals develop significantly worse than anticipated. Almost all insurers have Solvency II ratios within or above their respective target ranges and are far away from potential solvency events.
Subordinated insurance debt has suffered under the general market downturn and bond valuations followed as usual to a certain extent the valuation of bank paper.
Where and to what extent could insurers be exposed?
Insurers are typically exposed through asset re-valuation and underwriting losses. The losses in equity markets will be seen in the Q122 results of insurers and have a negative impact on their Solvency II positions, but we expect this to be manageable. Typically, equity backing ratios of insurers are only somewhere between 3-6%. We estimate that a 25% fall in equities should only result in a decline of the Solvency II positions of the major insurers by less than 10ppts.
Credit spread widening will have a similar effect and on average a 50bp widening will lower the Solvency II position by less than 10ppts.
But there is an offsetting effect from interest rates. As we have written before, the net effect of rising rates on the Solvency II position of insurers will be positive. So a 50bp rate increase will support the Solvency II position by 5-15ppts.
Only a few insurers have disclosed their direct investments in Russia and Ukraine. We note that most local assets are either held by the asset managers of the large insurers, i.e. there is no direct write-down risk for the issuer, or by their Life & Health businesses where profit sharing mechanisms with policyholders could alleviate the impact of write-downs.
Underwriting losses will be contained
On the underwriting side, insurers in our universe can be affected through local subsidiaries and in industrial/commercial lines as well as credit insurance. P&C business usually excludes war from coverage. However, there is war coverage in certain specialty lines.
Both the Ukrainian and Russian insurance markets have not been overly important for Western European players. Hence local subsidiaries are small, relative to the size of their parents. Uniqa and Vienna Insurance Group have the largest exposures but in the low single-digit percentages of premium income. For clarity, war coverage is usually excluded in retail business.
Transport business usually covers war risk on sea and in the air, but not on-shore and only if the sea or air transport commenced before the start of the war. Also Marine and Aviation businesses usually cover war risks. We assume that insurers have already exercised their rights to terminate any war coverage for the Black Sea and relevant airspace on short notice and that events which have so far been reported will not result in material claims for the sector.
In credit insurance, war is usually excluded from coverage, but many insurers also offer so called “political risks” insurance which cover defaults caused by political decisions and measures such as sanctions, expropriations or other barriers to trade. We have very little information about the exposure to Russia and Ukraine in these lines and the war is still ongoing. Only AXA has so far provided information about the extent of coverage which is not material for the group. Political risk is usually not a major line for the insurers in our universe and we are confident that losses will be only minor and that insurers will take underwriting actions on time.
Some uncertainty persists in cyber business. So far we not aware of major cyber-attacks which could potentially result in insurance claims. Cyber coverage usually excludes acts of war from coverage but it is up to the insurer to proof that a cyber-attack was such an act of war. In practice, this could turn out to be difficult. Market leader in this space is Beazley while most other insurers in our universe have only smaller exposures relative to the size of their books.
Regional exposures of individual issuers
Allianz indicated that proprietary investments in the region amount to approximately EUR2.0bn, mostly held by L&H business. This compares to an operating profit of EUR13.4bn in FY21 (guidance FY22: EUR13.4bn +/- EUR1.0bn) and Solvency II own funds of EUR86.0bn in FY21 and a Solvency II ratio of 209% at FY21. Revenues in the region amount to around EUR0.3bn p.a. compared to total group revenues of EUR148.5bn in FY21.
Uniqa disclosed investments of EUR200m held by non-local entities. In addition, the issuer holds around EUR150m of debt issued by Raiffeisenbank which has significant exposure to the region and is a minority shareholder in Uniqa. This compares to around EUR4.4bn of Solvency II own funds in FY20. Uniqa has local insurance subsidiaries in both Russia and Ukraine. However, both contribute only around 3% of premium income and 5% of net income to the business. These entities are currently valued at around EUR40m each in the books of Uniqa and the issuer did not recognise any goodwill.
AXA disclosed direct exposure to Russian assets of EUR50m plus a EUR144m exposure to Nord Stream 1, which is not subject to sanctions, yet. This compares to underlying earnings of EUR6.8bn in FY21 and Solvency II own funds of EUR62.0bn and a Solvency II ratio of 217% in FY21. In political risks insurance, the issuer has a maximum net exposure of EUR90m to Russia and EUR65m to Ukraine.
Generali has a 39% stake in the Russian insurer Ingosstrakh. The issuer did not disclose any precise numbers but does not expect potential write-downs to be material.
Royal London disclosed that it holds around GBP90m of securities issued by Russian and Ukrainian entities of which 74% is held by unit-linked business.
Vienna Insurance Group disclosed in its FY21 results that total premium income from Ukraine amounts to around EUR100m p.a. and an average profit contribution of around EUR10m in the last four years. This compares to a total premium income of EUR11.0bn and a Profit before tax of EUR511.3m in for the group in FY21. The NAV is around EUR55m and there is no goodwill. VIG has an investment exposure of EUR210m to Russia (of which EUR44m government debt and EUR113m corporate bonds) and EUR60m to Ukraine (of which EUR41m government debt and no corporate bonds).
Aegon disclosed that it holds only an immaterial amount of EUR27m of general account investments in Russia and none in Belarus. The issuer’s Responsible Investment Policy already excluded any investment in Russian or Belarussian government debt.
Outlook
The credit markets and subordinated insurance bonds have recorded price losses, some of them substantial, since the beginning of the war. In particular, rT1 paper underperformed as it followed the equity market while investors fled into archetypical safe havens. As a consequence, the market now undervalues the insurance sector even more than before the start of the war.
We expect rates to continue to rise in line with accelerating inflation concerns. Especially longer dated bonds could remain under pressure and hence we consider the shorter-end of subordinated insurance paper most attractive.
Yours sincerely
Plenum Investments Ltd.
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