The Greek debt swap is manageable for Fitch-rated European insurers. They have already written down their holdings in anticipation of the deal and would be able to cope with further losses on Greek sovereign bonds.
European insurers generally operate robust impairment policies and have written down Greek sovereign debt in line with falling market prices. They now hold Greek bonds at around 20% to 25% of their historical/amortised cost. They are therefore unlikely to incur further losses from the debt swap, which was widely supported by the sector.
Since the outset of the sovereign debt crisis insurers have gradually de-risked their balance sheets. Therefore, even in the event of a further default and write-downs in the future, we believe the sector as a whole would be able to cope with a complete write-off of all Greek sovereign debt.
We believe most of the losses related to Greece will be transferred to policy holders through lower returns. However, if further losses result in returns falling below the minimum level guaranteed to policy holders, insurers will have to make up the difference from their own equity.
Market participants estimate the implied loss of the debt swap relative to the original terms and conditions of the bonds at around 74%, and Fitch has downgraded Greece's sovereign ratings to 'Restricted Default'. We are monitoring insurers' exposure to peripheral eurozone countries, and could take rating actions if it rises above what we consider reasonable for the rating category.
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