Credit-default swaps spreads on insurance and reinsurance companies in Europe blew out substantially last week because of fears of the magnitude of their U.S. corporate exposure. From the previous Friday until Tuesday, mid-market protection on AEGON widened to 150 basis points from approximately 80bps. The name saw the most dramatic move over a short amount of time because of its exposure to the U.S. corporate bond market and the fact that it reports its financials in U.S. dollars, credit traders said. Mid-market protection on AXA widened out slowly over the past two weeks to approximately 150bps from 50-60bps.
Munich Reinsurance also saw a significant widening, blowing out to 80-100bps for five-year protection from 55-70bps a week earlier. Moody's Investors Service put Munich Re and American Re Corp.--its U.S. subsidiary--on review for possible downgrade last Tuesday. Moody's rates both Aaa for insurance financial strength and Aa1 for senior debt.
The insurance sector, in general, widened about 20-30bps over the past two weeks, traders said. But volume was not particularly high since there were no natural sellers of protection in the market. One trader said that it was mostly hedge funds looking to buy protection and paying up for it. "Every trade is like a one-off, with no real follow-through in the market," he said.
Ian Centis, credit analyst at Commerzbank in London, said the movement is mostly related to insurance companies' exposure to the equity markets, which includes some exposure to the U.S. market. "With the collapse in the equity markets, the value of their assets is falling and the margins by which they cover potential risks is thinning," he said.