torsdag 16 februari 2012

A&G's AIG Moment Approaching: Moody's Downgrades Generali, Cuts Megainsurer Allianz Outlook To Negative

For a while now we have said that the very weakest link in Europe is not the banks, not the ECB, not triggered CDS, and not even the shadow banking system (well, infinitely rehypothecated Greek bonds within a daisychain of broker-dealers, which ultimately ends up at the ECB at a negligible repo discount, that could well be the weakest link - we will have more to say about this over the weekend) but two very specific insurers: Italy's mega insurer Assecurazioni Generali, which at last check had more Greek bonds as a % of TSF than anyone else, and Europe's biggest insurer and Pimco parent, Allianz, which is filled to the gills with pretty much everything (for more on Generali, or as we like to call it by its CDS ticker ASSGEN read here, here, here, and here).

Well, Moody's just gave them, and the entire European space, the evil eye, and soon the layering of margin calls upon margin calls, especially if and when Greece defaults and a third of ASSGEN's balance sheet is found to be insolvent, will make anyone who still is long CDS those two names rich. Assuming of course the Fed steps in and bails out the counterparty the CDS was purchased from.

Here is the only chart one needs to know why ASSGEN will likely not be writing life insurance on itself

Don't worry though, those who don't understand jack shit will tell you it is all contained. But please ask them why - and ask them why Lehman wasn't when everyone said it too was.

In other words, it would take just a 4% impairment on the value of the held bonds for the tangible common to be wiped out. Or, looked at another way, assuming 28% of the FI portfolio is in Italy, if the €73 billion in implied Italian bond holdings were to decline by 14%, all else equal, the same end result would be achieved. This is precisely what the market is starting to realize.

Keep in mind ASSGEN is only one tens if not hundreds of comparable insurance companies, the bulk of whose assets are invested in sovereign debt, and confirming just why even the smallest dip in Euro bond price levels will set off a contagion across Europe that will make the Lehman bankruptcy like a walk in the park, and why very soon Europe will have to reach out and rescue not just banks, but insurance companies, then reinsurance, then all feeder companies, and so on, until all of Europe has to be backstopped by the ECB, and thus the Fed.

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