US insurers in Russian exposure warning

The US insurance industry will need to brace itself for substantial exposure to the ailing Russian economy, according to ratings agency AM Best.

AM Best said the impact of the conflict between Russia and Ukraine on US insurers’ direct investments to the two countries appears to be limited, as they have less than $2 billion bonds exposed to Russia and Ukraine. However, it is the indirect exposures that will bite.

In its latest report, “US Insurers’ Indirect Exposures to Russia May Be Significant,” AM Best estimates that the largest exposure at any company is less than 2% of capital and surplus, with the vast majority of these bonds investment grade NAIC-2.

The commentary warned that higher capital charges could result if the issues were to fall below investment grade for an extended period, depending on the duration of the conflict and other factors.

While US insurers have little exposure to Russian companies in their stock portfolios, they do have exposures to companies that derive a share of earnings from Russia.

“Indirect investments through suppliers and customers of US and European companies, such as Lukoil, may still be impacted, similarly to the already substantial impact on commodity and energy markets,” said Jason Hopper, associate director, industry research and analytics, AM Best.

The report cautioned: “With the worsening business operating environment in Russia, more companies have started discontinuing operations in the country; in addition, oil prices have spiked and with increased volatility in financial markets.”

The situation continues to unfold, making it too early to determine specific impacts, but the commentary added that the markets can be expected to rebound as has been seen in other geopolitical crises.

“As the impact of Russia’s attack on Ukraine reverberates throughout the world, no economy will be insulated from the fallout,” it warned. “The situation remains fluid, with new developments every hour. Many Western nations, in addition to members of NATO, have imposed steep sanctions on Russia, targeting everything from its central bank and leading financial institutions to large Russian-owned companies. The Russian economy has already been greatly disrupted, with the Rouble crashing as much as 30%, with the central bank more than doubling its base interest rate to 20%, among other measures enacted to try to keep money inside Russia.”

“There is speculation that Russia may default on its debt—or, at least, the concern is the highest since its invasion of Crimea”

AM Best said that at present, the impact of the sanctions on US insurers’ direct investments in both Russian and Ukraine appears to be limited. As of year-end 2020, US insurers held less than $2 billion in bonds issued by the Russian or Ukrainian governments, or Russian companies that have been sanctioned through March 1, 2022.

AM Best said already high profile companies have begun to withdraw for Russa and Russian related business, which is adding to the pressure on the country’s economy.

“BP sold its 20% stake in Russia’s oil and gas company Rosneft, and Delta Airlines discontinued its partnership with Russian Airline Aeroloft,” it said. “Further, Britain recently expanded its sanctions, including telling ports not to service Russian-flagged vessels, which is heavily impacting trade. Three of the world’s largest container shipping companies.”

It added that Maersk, Mediterranean Shipping Company, and CMA CGM, are halting non-essential cargo bookings to and from Russia.

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