European Insurers: How Long Before Capital Denial Becomes Capital Punishment

Following the recent downgrades of many of the major European banks and insurers and last year's comments by Fitch on insurers' inability to pass on losses to policyholders, the hot-topic of ASSGEN, ALZ, and the rest of the capital-impaired forced-soakers-up-of-new-issue-demand in the European insurance market are under new pressure as The WSJ points out today that new 'rightly punitive' capital rules have been watered down. The 2014 introduction of 'Solvency II' - the insurers' equivalent to banks' Basel III capital rules - did indeed attempt to create risk-weighted capital requirements and better balance assets and liabilities within these firms. However, as Hester Plumridge notes, regulators bowed to industry pressure (again) adding the ability to shift discount rates to get around low-rate-implied valuations for their annuity streams and the introduction of a 'countercyclical premium' to avoid the growing (and negative) spread between distressed assets and rising liabilities. As Plumridge concludes, "a solvency regime that ignores all European sovereign credit risk looks increasingly unrealistic. Investors could end up none the wiser." After some systemic compression, the last week or so has seen insurers start to deteriorate as perhaps the market will enforce its own capital expectations even if regulators are unwilling to.

Chart shows the spread (lower pane) between ASSGEN 5Y CDS and the Senior Financial 5Y CDS. Insurers also remain extremely highly correlated (and dependent) with XOver (or high yield credit).

The market started to price in the extra REAL risk in Insurers but the recent 'asset reflation' has lifted all boats and compressed that risk premium. It seems clear that while insurers have had their fair share of 'help' from regulators with these ridiculous capital 'adjustments', they will always lag the kind of explicit support the banking sector seems to have and so an Insurer - Senior Financial decompression trade seems like a low cost long vol play on further stress in Europe as the market will enforce its own capital expectations even if the regulators will not.

Chart: Bloomberg

Comments

[machineh]

'Countercyclical premium' -- LOL!

Yesterday a bum in Times Square asked me, 'Can you spare a dollar for a countercyclical premium, kind sir?'

[achmachat]

can you still buy a small cheeseburger for a dollar in New York?!

[Yen Cross]

Do ya need a magnifying glass to count the Sesame seeds?

[Ahmeexnal]

Capital Punishment (DEATH PENALTY) will soon come to the power elite!!!

[NotApplicable]

Does McDonald's count?

[Ahmeexnal]

Your next hamburger:

http://www.telegraph.co.uk/science/science-news/9091628/Test-tube-hambur...

You want a chicken burger? no problem.
Beef? no problem.
Human burger? no problem.

[reload]

These so called insurers: Purvayors of expensive financial products, make their living ripping off the little people who think they are doing the right thing putting cash into savings plans, endowments, annuities and the like. They are utter parrasites and do nothing of value. What they actualy do is perpetuate the missalocation of capital into high risk low return government paper while making out they are doing something clever. The sooner it ends the better.  

[LawsofPhysics]

You are correct.  The "best" deal one would get working with these companies would be as an initial underwriter that helped set up the company and was either paid out quickly with interest or paid a portion of the revenues for a very long time.

[Snakeeyes]

This is if you believe CDS prices any more.

[ekm]

The reasons are irrelevant. If the decision has been made, they will attack, destroy and pull back. NO INVASION.

USA is the only world power is world history that does not obtain land via attacks. It is pretty amazing. Better USA protection than Chinese or Russian yoke.

[Elmo The Great]

In the forseable furture who would purchase CDS units for false protection?

[NotApplicable]

Those who understand accounting is just another confidence game with a political back-stop (assuming your club dues are paid).

[dracos_ghost]

In the forseable furture who would purchase CDS units for false protection?

Sovereigns. Gotta keep that CDS teat pliable for the vampire squid.

[MsCreant]

 "the market will enforce its own capital expectations even if the regulators will not."

There is no market. There is only a rigged Carney game staging something that looks like a market to keep up appearances. I, like Bob on bonds this morning, wonder why anyone tries to guess anything based on the stats any more. Unless you know the dirty hearts of central bankers, and their timing, you can't guess much except that this is unsustainable.

[LawsofPhysics]

You are also correct, well at least so long as supply lines remain dependable.  When goods and services stop crossing boarders, troops do.

[MsCreant]

Agree 100%

That is the 2 x 4 to the head that it will take to make folks wake up-- Resource scarcity. Until then, the show will go on.

[Duffminster]

Not directly related, but a story I haven't yet seen indepth at Zero Hedge.  Tyler, hope you'll dig into this one.

Robosigning "settlement" not only Throwing Contract Law in the Trash but is a Bailout to Big Banks by Tax Payers

[ebworthen]

This is one of the reasons for U.S. National Sickcare; U.S. insurers and corporate sickcare would like nothing better than to force everyone to send monthly tribute to their hegemonic enterprises while denying care, raising premiums and co-pays, while the government furiously writes waivers for big corporations and kleptocratic organizations who are lobbyists or donors to campaigns.

Insurance has steadily become little more than a shadow tax, a profit mechanism for lawyers and corporations locked in a false battle of good-versus-evil that is little different than the false-flag Democrat/Republican oligarchy.

[weinerdog43]

Well said.  However, I would point out that there is legitimate insurance (homeowner, auto, business liability, etc...) and then there is health insurance. 

Health 'insurance' is a scam.  Everybody dies, and as you get older, you are more likely to have health problems.  It becomes a round robin of finger pointing who has to insure the oldsters.  And by oldsters, I mean anyone older than 40.  This stupid scam encourages companies to dump older employees.  The smaller the company, the worse their health care insurance costs.  

[sharpe]

Outside of the UK - which insurers have large annuity books?

I think this article is barking up the wrong tree as these regulations for annuity books do not apply to most european insurers

[Alcuin Bramerton]

The recent downgrades of many of the major European banks and insurers may have been due also, or in part, to inside privileged and advance knowledge of what David James Bt (Lord James of Blackheath) was about to disclose to the UK House of Lords on Thursday 16^th February 2012.

James cited the $15 trillion HSBC & RBS funds of Yohannes Riyadi, and the enabling part played in that money laundry by Yusuke Horiguchi and the US Fed nexus. His supporting papers are now on the public record in London.

http://is.gd/QwWUGr

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