Ukraine crisis: S&P on ‘high alert’ for insurance exposures

Russia’s attack on Ukraine on February 24, 2022, may not have been a surprise, given the huge build-up of Russian troops on its neighbour’s borders and its previous invasion of Crimea in 2014, but it did send shockwaves around the world.

The invasion has, beyond the human cost of a brutal war, shaken global financial markets and sent energy prices soaring. It’s in this macroeconomic context that Simon Ashworth, chief analytical officer for insurance ratings at S&P Global Ratings, told Intelligentinsurer.com that S&P is on “high alert” as it monitors the “dynamic and fast-moving situation”.

Before the invasion, S&P warned of the impact of escalating geopolitical tensions and outlined the potential impact of sanctions.

“This really goes back to the beginning of February. Notably at that point we cited three particular risks as having potential downside risks to global credit conditions for all asset classes, so not just insurers. They were rising geopolitical tensions, persistent inflation, and higher borrowing costs,” Ashworth said.

Following the invasion, S&P lowered the sovereign ratings on Russia but also on Ukraine by one notch and placed them on CreditWatch with negative implications (on February 25, 2022).  Just days later, it downgraded the ratings of three Russia-domiciled insurers.

Credit ratings for Ingosstrakh Insurance, in which Generali holds a minority stake, and Sogaz Insurance were cut to BBB- from BBB. These two insurers were placed on CreditWatch negative to reflect the lowering of the local currency sovereign credit rating and CreditWatch status of Russia. The third firm was Sberbank Insurance, which had its financial strength ratings cut to BB+ from BBB- and was placed on CreditWatch negative. This was due to a combination of the lower Russian sovereign credit rating and “pressure” on Sberbank group’s creditworthiness.

Five more Russian insurers—VSK Insurance JSC, Energogarant PJSIC, Lexgarant Insurance, Alfastrakhovanie OAO, and Insurance Co. RESO-Garantia (and its non-operating holding company, Stanpeak)—were placed on CreditWatch negative.

“The takeaway is that all actions have been driven by the action on the Russian sovereign. All those insurers are on CreditWatch negative given the escalating and somewhat unforeseen geopolitical and macroeconomic pressures.” Ashworth said.

S&P has also suspended the rating on Russian insurer Rosgosstrakh until further notice. “Prior to suspension this insurer was on CreditWatch negative as well. That is linked to the designation of that insurer as a specially designated national (SDN) by the US department of the Treasury’s Office of Foreign Assets Control,” he added.

The road ahead for Russia’s insurers will not be easy, but the same businesses are getting a “temporary reprieve” from the worst of capital volatility, Ashworth said.

“Like banks, Russian insurers are permitted within their regulatory capital calculation to look at securities valuation as of February 18, 2022, prior to the capital market’s volatility.

“That’s an important factor with respect to the regulatory capital ratios for insurers,” he said. And this data is important for credit ratings analysis.

“From a regulatory capital perspective there’ll be a kind of freeze, or a continuation of the position prior to capital market volatility, there’s certainly a temporary freeze, or a reprieve.”

For Russia’s P&C sector, even before these events, the ratings firm deemed the operating environment to be of “moderately high risk” as a result of some macroeconomic pressures but also specific industry growth factors, or a lack of them. “There was still a profitable sector, but we’d seen that profitability eroded over recent years,” Ashworth added.

Insurer exposure outside Russia

Localised impacts on insurers in Russia will surprise no-one. What is interesting is the apparently “limited” exposure of the wider re/insurance industry to the crisis.

Swiss Re chief financial officer John Dacey said: “There aren’t many global market players on these Russian markets in any material way.”

Speaking at the reinsurer’s earnings conference on February 25, 2022, he said Swiss Re has no Ukrainian assets, with Russian assets limited to a minor fixed income position.

“We do write business in both countries, but on restricted lines,” Dacey said. “We’ve been cautious about our exposures in these markets for some time.”

“I don’t see a situation in which this would be anything dramatic or material in a year’s earnings for us,” he added.

Many global re/insurers outside Russia have been shielded from credit rating downgrades due to their lack of exposure in Russia, according to Ashworth.  But there are “small pockets” of insurer exposure outside Russia and Ukraine, he added.

“A number of insurers in the Taiwanese market have linked some Russian exposure to their investment strategy, and foreign investments.”

This exposure equates to around 6 percent in the aggregate level but, he added, that can range more widely for different insurers within that market.

“As with the global markets, which have increased their capital buffers since the height of the COVID-19 pandemic, we believe that capital buffers that have been rebuilt within the Taiwanese market will hold there,” he said.

One European re/insurer, Cyprus-based KLPP re/insurance, has also been placed on CreditWatch negative by S&P primarily because of its links to asset exposure to Russia.

These relatively limited pockets of exposure may be a result of strategic shifts made by Europe, Middle East and Africa (EMEA)-based primary insurers to “edge back their operations from Russia” over the last few years.

“This has happened slowly but Russia has not been a strategic country for growth for a number of the conglomerate insurers that are themselves based in EMEA,” Ashworth explained.

The long haul

So far, the sanctions imposed on Russia have not slowed the military advance ordered by Russia’s president Vladimir Putin. But ongoing sanctions could be key to cessation of hostilities. As a result, Ashworth said, it was important for S&P to continue to look at payment risk and the payment of obligations under insurance policies as direct sanctions bite.

“One thing that’s really important, specifically for insurers outside Russia, is to look at their exposure domestically. This may be more policyholder-based exposure within Russia versus their pure shareholder exposure.

“From a credit ratings perspective, potential shareholder exposure could be most important in those cases as opposed to locally domiciled policyholder exposure within the Russian operating entities”, he added.

A large number of EMEA insurers have direct operations within Russia, he said, so S&P needs to separate out shareholder exposure versus that of local policyholders to get a clear picture.

Another area to watch is the expected increase in cyber attacks emanating from Russia. Insurers are unique with respect to cyber because some firms offer cyber re/insurance directly, but they are also directly exposed to cyber attacks themselves, Ashworth said.

“Often, particularly with cyber, re/insurers can be even more exposed than non-cyber providers because they hold the data on a lot of cyber insurance policies, which is extremely valuable data to threat actors.”

For cyber insurers, S&P re-emphasised risks around silent cyber, or embedded cyber, that insurers are inadvertently exposed to. “With cyber insurance, we see the benefits of having affirmative cyber to the extent that cyber insurance policies can be clearly standalone and packaged up.

“The terms and conditions themselves can then be better understood, and whether those terms and conditions include or exclude certain aspects with respect to war-like actions and how cyber policies cover those,” he said.

The issue of cyber risk is a longer term one, now amplified and accelerated by the conflict. Another ongoing pressure of the slow global recovery from the COVID-19 pandemic will also be affected by the war in Ukraine.

Ashworth was in no doubt that the conflict will prolong some of the effects of the pandemic for the insurance market.

“That’s already happening from the results in the capital market volatility. What’s important to mention is that, at this stage, we’re seeing this conflict more as an asset-related shock compared to an asset and liability-related shock with respect to COVID-19,” he said.

“The insurance sector as a whole fared extremely well in aggregate with respect to the pandemic stress that was forced upon it.

“There’s no reason to think that this shock will be any different, particularly as capital has been rebuilt to almost pre-pandemic levels.”

Throughout 2020 and 2021, S&P was quick to take a range of downgrades, often again linked to sovereign through the pandemic and other negative outlook changes usually linked to financial market pressures. A large number of those were reversed as capital markets recovered as well, Ashworth explained.

“That underscores the relative stability of the global insurance industry heading into this shock. I’d also re-emphasise the relative capital strength for global re/insurers that weathered the pandemic stress test well, largely linked to capital strength.

“This is one of the reasons insurance ratings are higher on average than almost every other asset class that we rate within S&P,” he concluded.