Insurers and reinsurers providing directors and officers liability and errors and omissions coverage could see "manageable" losses from the subprime mortgage collapse that exceed $2 billion, Bank of America reported today.

But, analysts at the bank said, the losses are unlikely to affect projected financial performance for the group.

Reinsurers, the analysts said, will bear less of the loss because many have limited exposure to financial institutions "or have carefully negotiated terms and conditions that will limit their exposures."

Since 2004, the largest 10 buyers of professional liability reinsurance have reduced the amount of business they reinsure by 60 percent, the bank said, citing a Guy Carpenter brokerage report.

As a result, the analysts said, they have a "positive view" of the reinsurance group, although exposures vary by company.

They explained that "strong underwriting margins on property and casualty reinsurance and improved risk management should drive book value growth."

The reinsurance industry "has a strong reserve position, and investment income is growing," they said.

The losses will be prompted by exposure to director and officer liability coverage, and could possibly "reach significantly higher levels," analysts Kevin O'Donoghue and Alain Karaoglan said, citing Guy Carpenter estimates.

Losses could also arise from errors and omissions coverage written for mortgage brokers, real estate agents and investment managers, the analysts said.

Despite that, the analysts said, Bank of America is estimating a 15 percent return on assets for the group in 2008 and 14 percent in 2009.

The reason they gave is that carriers have high initial levels of "incurred but not reported losses (IBNR)" constituting more than 80 percent of total reserves for the industry in addition to reserve redundancies on business written in prior years. IBNR is essentially a reserve that insurers carry for claims that have occurred but they don't yet know about.

In noting that reinsurance exposure varies by company, the analysts said that Renaissance Re announced Jan. 16 it would set aside a $55 million reserve for "casualty clash" business associated with exposure to subprime mortgage losses.

"Casualty clash" is a coverage similar to catastrophe reinsurance in that loss reserve provisioning is triggered by an event, the analysts said. "We believe RenRe is being conservative in setting aside these reserves," they added.

The analysts also said that many other Bermuda reinsurers write varying levels of professional liability insurance and reinsurance. IPC Re has no exposure, and Montpelier Re's exposure "is extremely remote, in our view," the analysts said.

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Insurance Sector Subprime Loss Could Exceed $2B

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