New York Attorney General Eliot Spitzer's inquiry into the insurance industry is spreading beyond the Empire State and across the pond. European insurers' bonds are ebbing and flowing on news of the investigation, indicating the sector could be in for a rocky ride as fears mount about a wider inquiry. "It could take as long as 12 to 18 months before the inquiry is no longer a source of headline risk for European insurers," predicted one research analyst in London.
Bonds of Munich Reinsurance and Zurich Financial Services, companies that were mentioned in Spitzer' inquiry, widened by more than 10 basis points in the week after the case against Marsh & McLennan was announced. Hannover Reinsurance followed suit as investors speculated the whole of the reinsurance sector might be investigated. While spreads have started to come back in--although not to pre-inquiry levels--analysts are divided about whether to recommend getting in at these levels given the likelihood of continued volatility in the sector. And they are becoming increasingly concerned the inquiry could widen to include life and health insurance companies, whose bonds have so far remained relatively stable given the focus on property-casualty insurers.
Few European life and health insurers have significant U.S. exposure, but should Spitzer decide to involve the sector, bonds in ING, Aegon and Prudential would be affected, according to researchers.
Another wildcard is whether Spitzer's probe will prompt the U.K.'s Financial Services Authority, which is set to take control of the insurance industry from the General Insurance Standards Council in January, to initiate its own investigation.