February 12, 2008 / 12:43 PM / 10 years ago

European insurance stocks slip on AIG's credit woes

LONDON (Reuters) - Shares in European insurers slid on Tuesday as Monday’s news of an accounting hole in the derivatives portfolio of American International Group Inc (AIG.N) triggered renewed fears over their subprime exposure.

The DJ Stoxx European insurance index was the only sector in negative territory at 1154 GMT, down 0.2 percent, having been down as much as 2.2 percent earlier in the morning. The DJ STOXX index was up 1.1 percent.

Old Mutual (OML.L) shares were down 1.8 percent, while AXA (AXAF.PA), Allianz (ALVG.DE), Zurich Financial Services ZURN.VX and Swiss Re RUKN.VX -- companies seen as having large exposure to U.S. structured credit products -- all slipped around 1 percent.

Investors were also unnerved by market talk of write-downs of between 6 billion and 8 billion euros at ING ING.AS, linked to its U.S. real estate business.

ING shares were down 0.6 percent, having fallen as much as 6.4 percent. It declined to comment on the speculation but said it was aware of its obligation to notify the market on any “material deviations”.

Landsbanki Kepler analyst Fabrizio Croce cut his target prices on Allianz, Swiss Re and Zurich Financial to take account of the risk these firms might reveal much higher charges as a result of AIG’s move.

“AIG reports in U.S. GAAP. European insurers mostly in IFRS. Although it could not be sensible to apply this market value approach to insurance companies, we believe there is a risk European auditors could apply similar rules for European companies. This could lead to several profit warnings,” said Croce in a note.


AIG said on Monday PricewaterhouseCoopers, its external auditors, had concluded AIG had a material weakness in internal financial reporting controls relating to the credit default swap portfolio obligations of its unit AIG Financial Products Corp.

The news reignited fears that insurers’ huge investment portfolios could include big exposures to risky structured credit products.

These fears saw insurance shares hit hard since the subprime mortgage crisis erupted last year, with the European sector underperforming the wider market by 12 percent last year.

But firms sought to reassure jittery shareholders over their exposure to the structured credit crisis.

    Old Mutual said 4 percent of its U.S. life investment portfolio had exposure to subprime mortgages, equivalent to around $893 million.

    “We will experience mark-to-market losses on some holdings, but are well matched to our liabilities and are fully able to hold the investments through this turmoil, or to maturity,” an Old Mutual spokesman said.

    Swiss Re RUKN.VX, which shocked investors in November with a 1.2 billion Swiss franc ($1.09 billion) subprime-related write-down, said it valued all its investments based on market prices, including risky credit derivatives, and that it used an independent third party to mark any assets where no market prices were available.

    The market will be closely watching Zurich Financial Service’s annual results on Thursday for any indication of an accounting hole regarding its structured credit investments.

    “ZFS should be moderately hit as on the one hand the exposure is considerable ($20 billion), but on the other hand the company has an over reserving (particularly in life) as a well as a overcapitalization that should help the company in offsetting this negative impact,” Kepler’s Croce said.

    The German financial services watchdog Bafin repeated on Tuesday that it saw no increased risk to German insurers from the subprime crisis.

    Additional reporting by Douwe Miedema in Zurich, Philipp Halstrick in Frankfurt and Clara Ferreira-Marques in London, editing by Will Waterman and David Cowell

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