Analysts at AM Best have warned that US insurers and reinsurers face “significant” exposure to the economic fallout of sanctions placed on Russia, following its widely-condemned invasion of Ukraine.
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 ruble 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.
At this point, AM Best believes that the impact of the sanctions on US insurers’ direct investments in both Russian and Ukraine appears to be limited, with the largest exposure at any company still representing less than 2% of capital and surplus.
As of year-end 2020, the market held less than $2 billion in bonds issued by the Russian or Ukrainian governments, or Russian companies that have been sanctioned, and the majority of these bonds were investment-grade NAIC-2, which means higher capital charges if the issues fall below investment-grade for an extended period or if interest payments are missed in the event of default.
US insurers are also not thought to have much exposure to Russian companies in their stock portfolios, although they do have exposures to companies that derive a share of earnings from Russia, AM Best notes.
Additionally, indirect investments through suppliers and customers of US and European companies may still be impacted, similarly to the already substantial impact on commodity and energy markets.
With the worsening business operating environment in Russia, more companies have started discontinuing operations in the country, and countries across the world continue to seek further sanctions.
Oil prices have spiked and volatility in the stock market has worsened, and AM Best acknowledges that specific impacts are difficult to determine, given the ongoing nature of the crisis.
However, it does believe that insurers are in a favorable position, having recouped more than double the unrealized losses suffered in the first quarter of 2020 at the beginning of the COVID-19 pandemic, driven mostly by property and casualty insurers.
