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Italian Debt Threatens Europe’s Savers

NOVEMBER 11, 2011, 6:41 A.M. ET
Italian Debt Threatens Europe’s Savers .

Italy could deal insurers a lethal blow. Europe’s insurers own an estimated €300 billion (about $408 billion) of Italian sovereign debt—equivalent to a large chunk of their €450 billion shareholders’ equity, notes JP Morgan. While banks’ exposure has been much debated, an Italian default or euro exit could devastate insurers’ capital and in turn Europe’s savings.

Insurers’ holdings make up a sizeable chunk of Italy’s €1.6 trillion government debt. Some insurers have cut exposure—Zurich Financial Services sold around €2.3 billion in the last quarter—but many are reluctant to crystallize big losses when they hold assets to maturity and a default is still an outside scenario. Finding enough long-dated assets to replace them and back their huge liabilities is tricky.

Italian insurers—among the sector’s largest holders of the debt—are already suffering from low domestic bond prices and falling equity markets. Fondiaria SAI declared a €250 million asset write-down last month. An Italian default could be a potentially fatal blow. Trieste-based Assicurazioni Generali’s gross exposure to Italian government bonds is more than double its shareholders’ equity. Losses on bank debt and equity holdings would likely amplify the problem.

Foreign insurers, too, have sizeable Italian debt holdings and could face big hits to their capital. German-based Allianz, one of Italy’s largest insurers, has a €26 billion gross exposure. If Italy were to leave the euro, domestic insurers might at least be able to re-denominate their policies into the new currency, but foreign players could face an additional currency risk. Much of their holdings back policies in other countries, meaning the assets would devalue but not the liabilities.

Shares in Europe’s insurers have fallen between 5% and 10% in the past two weeks, but the sector still trades at or just below book value. It’s difficult to price in an Italian default or euro break-up, which might prove an unmanageable capital event for many. Ultimately, politicians and regulators may find a solution that shields the industry.

But the effects would still likely be felt by savers. Policyholders in many life insurance products bear 80%-90% of any losses on insurers’ investments unless minimum return guarantees are breached. If a country leaves the euro, devaluation and inflation could destroy much of the value of its domestic savings, with or without crushing its insurers.

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