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Will European financial crisis hit U.S. insurers?

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Observers on both sides of the Atlantic say the eurozone sovereign debt problems are not likely to have a direct effect on U.S. insurers, at least not immediately.

But the fact that a direct impact is unlikely doesn't mean U.S. insurers should not be concerned about the developments. For example, a flight from European government bonds could increase demand for U.S. Treasury bonds and drive already-low interest rates even lower, thus reducing returns on U.S. insurers' investment portfolios. And insurers could come under greater regulatory scrutiny if they suffer investment losses.

Ratings agencies such as A.M. Best Co. Inc. have lowered their ratings on some European insurers as a result of the eurozone's financial crises. But U.S. insurers have been spared such negative impacts.

“There's not a lot of direct investment, so there's not a lot of direct exposure,” said Howard Mills, director and chief adviser of Deloitte Services L.P.'s insurance industry group in New York. “But there is a lot of concern, because if the eurozone crisis deepens, that could have an impact on the global economy.”

Mr. Mills said if insurers suffer investment losses as a result of the continuing eurozone crisis, they could finally start to deplete their capital—and with an enhanced regulatory focus on capital, “that could bring some regulatory scrutiny.”

Graham Fulcher, a managing director of Towers Watson & Co. in London, said he thought any impact would be indirect. He noted that there have been ratings downgrades on some European insurers, but “so far they've not particularly impacted the reinsurance industry.” He also said last year's unusually heavy catastrophe activity has had a “much bigger impact” on reinsurers. But if the sovereign debt crisis spreads to France and Italy, “you could see some impact on some of the reinsurers.”

Mr. Fulcher said a bigger impact would occur if people worried about eurozone sovereign debt seek a safe haven by investing in U.S. Treasury instruments. That would drive down yields, further cutting into U.S. insurers' investment income. “Realistically, property/casualty insurers will have to make underwriting profits,” he said.

“We don't see U.S. companies investing heavily in European bonds, so we don't see the impact from an investment standpoint on the U.S. companies from what they hold,” said John Andre, group vp at Best in Oldwick, N.J.

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“I don't believe that the eurozone woes will have a meaningful impact on U.S. insurance markets,” Robert Hartwig, president of the New York-based Insurance Information Institute Inc., said in an email.

“By meaningful, I mean that I don't believe there will be a discernible impact on capacity, price, competition or terms/conditions of coverage,” said Mr. Hartwig. “I include the U.S. subsidiaries of major European companies that operate in the U.S. in this assessment.”

But he said there could be some impact. For example, U.S. insurers and reinsurers that operate in Europe “could well see revenues fall as much of the eurozone descends into recession.”

Mr. Hartwig noted that U.S. insurers hold very little European sovereign debt and even less from countries such as Greece. “Most would hold none at all,” he said.

Some insurers could be indirectly exposed through holdings of shares in banks that are exposed to the problems in Europe,” but this exposure would not be worrisome,” said Mr. Hartwig. “Other considerations—a falling euro—could diminish the dollar value of profits repatriated to the U.S., but that risk is manageable via hedging strategies.”