Allianz and Generali followed rivals in aggressively writing down holdings of Greek government bonds on Friday, fuelling investor concerns about the possible impact on global insurers of a worsening sovereign debt crisis.

Meanwhile, shares of U.S. insurers continued their sharp decline, as weak markets and the persistently low interest rate environment weighed on earnings and drove fears of a fresh economic downturn.

Insurers around the world are caught in a difficult situation. Government bonds are either yielding too little to fund liabilities over the long term, or are too unstable to be a reliable part of a conservative portfolio. Some are turning to equities to try and boost returns, except that plunging stock markets will give them little relief.

From a peak in late February, European insurance shares are down 24 percent and U.S. insurance shares have fallen 21 percent. The MSCI All-Country World Index is down 15 percent over that period.

There's a problem because there's a question of leadership. Everyone knows we have a problem, so let's not ignore it, AIG Chief Executive Robert Benmosche told Reuters this week, referring to the economic malaise that has dragged down markets. This is not about kicking a can, this is about leadership.


Analysts say major European insurers have moderate exposure to Greek sovereign bonds, but would face more damaging losses in the event of a default by bigger debtors such as Spain or Italy. Some U.S. insurers are also exposed, though they have been cutting European sovereigns from their portfolios.

Given recent stresses, top-tier U.S. insurers including MetLife and Allstate have said they were increasing their cash positions, both as a safeguard and in case opportunities arise to buy assets cheaply.

But the release of earnings by the leading European insurers is the first real indication of the cost of their exposure to Greek bonds, giving investors a taste of the potential losses.

Allianz reported an 8 percent decline in second-quarter profit, surprising analysts on their expectations of a 23 percent increase. The German insurer wrote off half the value of its Greek sovereign exposure, cutting net profits by 326 million euros ($462 million).

Today is not an ideal day to report results and this is particularly true when net income misses on the back of a Greek sovereign writedown, Espirito Santo analyst Joy Ferneyhough said in a note. Shares in Allianz, Europe's largest insurer, were down by 4.5 percent as of 1608 GMT.

Italy's Generali also took a sizeable hit on its Greek debt, writing down the value of its holdings by 47 percent. The company still managed to beat analyst forecasts with a nearly 13 percent increase in operating profit.

Allianz and Generali's writedowns follow a similar approach from rivals Axa and Munich Re, who on Thursday took haircuts of 40 percent and more than 50 percent respectively on their Greek bonds.

The writedowns exceed the 21 percent cut agreed by private sector creditors in last month's second Greek bailout package, an approach that has also been taken by some of the banks which signed up to the deal.

We estimated 21 percent to be sufficient ... but the company decided to execute kitchen sinking and write down to market value. We appreciate this, Kepler Capital Markets analyst Fabrizio Croce wrote in a note.


Allianz said taking the tough line by writing down holdings of Greek bonds to their market value might create scope for reversing some of that loss in future, once the rescue plan for Greece is put into effect.

In an interview with Reuters Insider TV, Allianz's chief financial officer, Oliver Baete, declined to speculate about the amount of any write up, but highlighted the gap with companies that had been less severe with their own Greek writedowns.

If we had taken measures as others had done, we would have written down 200 million (euros) less than we have, Baete said in the interview, adding that reversals on the writedowns could begin as early as this autumn. (For the Reuters Insider interview with Baete see: )

Prudential, which reported a forecast-beating 25 percent rise in profit thanks to strong growth at its flagship Asian unit, said it was insulated from the eurozone crisis as its risky sovereign holdings were small. Still, the British insurer's shares fell by 1.8 percent.

And although Anglo-South African insurer Old Mutual said turmoil on world stock markets may delay the planned share flotation for its U.S. fund management business next year, it too reported robust earnings. London-listed shares nonetheless fell by 2.2 percent.

(Additional reporting by Ben Berkowitz in New York, editing by Alexander Smith, Greg Mahlich and Matthew Lewis)