The insurance industry feels the brunt of Lehman Brother's financial ruin
The insurance industry has revealed varied levels of exposure to recent market upheavals. Munich Re has felt the biggest blow from Lehman Brothers' failure at £276m, closely followed by Aviva at £270m. Insurers and re-insurers were large investors in the bank both through corporate bonds and direct equity share holdings.
William Hawkins, an analyst at investment bank Keefe, Bruyette & Woods, said: "Most large companies have made comments. These generally give the impression that losses from direct impact to Lehman Brothers' securities can be absorbed within 2008 estimated earnings. The potentially bigger question comes from the indirect exposure to disruption in the derivatives market from the closure of a major counterparty. Aegon's comments in this regard are reassuring."
Aegon admitted to £209m of debt risk and an un-quantified amount of derivative exposure, but held no equity. The group said that "the effect of unwinding derivatives is expected to be immaterial. The impact on earnings and capital should be substantially lower than £209m because of tax, recovery values and other factors."
£209m is 18% of 2008 estimated profits and 9% of 2009 estimated pre-tax profits.
Axa has said it has no direct shares in Lehman but its credit exposure is £553m, mainly in with profit bonds. However it said the net economic impact will be around £237m, less any possible recoveries. Generali admits to £86.9m in debt exposure to Lehman, while Hanover Re said it had £18m in Lehman bonds, but that it did not expect to lose all its money on the company. Friends Provident announced the same amount, while Swiss Re said it had a £24.9m exposure to Lehman.
At time of going to press Allianz had not revealed how it has been affected but Hawkins said it is large. He said: "We understand that the insurance company has no direct equity exposure to Lehman's but a mid double digit bond investment in the non-life division - we guesstimate in the range of £39.5-£55.3m - and a low triple digit figure in the life division - probably around £126.5 - £142m.
The Prudential said it expects to lose two thirds of the value on £64m worth of Lehman fixed income securities and that it holds £49.5m worth of Lehman derivatives. In addition is has lost money on £8.8m of other investments with Lehman.
On AIG, Hawkins said: "Few have yet given formal disclosure about their exposure to AIG because the insurer's outlook is more uncertain than Lehman's. We would be surprised if any direct equity or debt exposure were material." However, Aviva is known to have £148m bound up in the insurer, the Prudential £107m and Swiss Re £99.7m.
