An insurance analyst from Bear Stearns has tripled his prior estimate of potential losses to liability insurers stemming from the credit crisis--raising a $3 billion guess he published in September to $8-to-$9 billion.

In a research report published in late January, David Small of Bear Stearns in New York repeated the same methodology he used in his prior report to estimate a "potential worst-case scenario" of directors and officers and professional liability losses for the insurance industry arising from the subprime mortgage crisis.

But with the starting point of his analysis--the number of financial institutions and related companies that lost more than 40 percent of their market capitalization in 2007--soaring to 154 from only 55 in his original analysis, the insurance loss estimate ballooned as well.

Mr. Small's report also noted the total market capitalization loss for these companies has soared to $446.6 billion from $65 billion tallied at the time of his Sept. 6 report.

Separately, in early February, New York-based Advisen Ltd. estimated that write-downs of subprime exposures by 120 financial institutions exceeded $230 billion, and that D&O losses for these institutions could reach $3.6 billion.

Advisen--a provider of technology and data to the commercial insurance industry that has been tracking financial institution write-downs across the globe--noted that its $230 billion tally had jumped more than 30 percent in just one month, ballooning from a January total of $173.2 billion.

In the January report, Advisen had estimated more write-downs to come, reporting 112 companies that had recorded write-downs to that point had disclosed total subprime-related assets of $440 billion to date, but that some exposure to collateralized debt obligations and other subprime-related investments had not been disclosed.

At that point, Advisen estimated that just those 112 companies might actually have carried as much as $1.2 trillion of subprime-related assets (pre-write-down) on their balance sheets.

The latest Advisen forecast of D&O losses is based on historical securities class-action settlement patterns and D&O program limits and retention data from Advisen's Program Benchmarking database, the company said.

In the February report, Advisen also reported that 181 subprime-related lawsuits have been filed, up from 138 tallied in its mid-January report.

Bear Stearns' Mr. Small, in his most recent analysis, split the financial institutions and other companies he identified into micro-, small-, mid- and large-cap companies, and assumed average exposed policy limits for each group ($100 million for the medium-sized companies, for example). This analysis repeated the steps he took to come up with his original $3 billion worst-case estimate last September.

Although this set of calculations produced a worst-case figure of $9.3 billion this time around, a lower reported range of $8-to-$9 billion reflects the fact that some large financial institutions may self-insure much of their D&O exposure, he wrote.

Mr. Small also noted in his report that his discussions with insurance underwriters and brokers suggest insurers are already receiving an increasing number of notices of circumstance--some of which will likely result in actual claims down the road.

In addition, the report highlighted a Jan. 3 announcement by Boston-based State Street Corp. that it would reserve $618 million before taxes ($279 million after taxes) to address litigation arising out of its investment management activities that put some customers in securities backed by subprime mortgages.

The Bear Stearns analyst suggested that this scenario is a "reasonable example of what could come from other financial institutions."

Insurance experts, speaking last year at the Professional Liability Underwriting Society's international conference, noted that one case along these lines already filed is Prudential vs. State Street & Trust Corp. and State Street Global Advisors.

In that lawsuit, Prudential, which acted as an adviser for pension funds, is actually suing a subadviser, State Street, which Prudential alleges did not follow certain investment guidelines. Prudential, which stepped in and made its pension clients whole, is now seeking to recover those losses from State Street.

Such litigation against investment advisers threatens to impact errors and omissions or professional liability insurers, experts said.

Separately, in an interview with National Underwriter last month, Scott Carmilani, chairman and chief executive officer of Bermuda-based Allied World Assurance Company, predicted that D&O insurance losses would likely outweigh E&O losses.

While "it's an equal issue for both [coverage] parts"--D&O and E&O--he said, "D&O towers tend to be bigger and pay more than the E&O towers."

"The people who buy E&O insurance don't buy as much as they buy D&O insurance," he said. "So the pure losses [to the companies involved in subprime-related litigation] may be as high, but the insurance costs will be higher for D&O than for E&O."

In addition to estimating overall D&O and E&O losses for the industry, the Bear Stearns report attempted to identify insurance companies with the greatest exposure. Applying market shares to the overall worst-case figure, the report identified American International Group and XL each as having more than $1 billion of exposure.

The report went on to list ACE and Chubb as having worst-case exposures of roughly $741 million, along with Lloyd's, CNA and Travelers as having worst-case exposures of about $649 million.

Advisen--in its report titled "The Crisis in the Subprime Mortgage Market and Its Impact on D&O and E&O Insurers"--predicts the losses will be borne by a small group of financial institution D&O insurers.

"As the subprime story unfolds, the potential impact on the insurance industry becomes clearer," said a statement from Dave Bradford, Advisen's chief insurance industry analyst and author of the report. "Losses to D&O and E&O insurers will be significant, but not cataclysmic."

Still the report says that securities class-actions and related suits will likely add 30 points to the U.S. insurance industry D&O loss ratio for 2007 and 2008 combined.

Advisen also reported that insurance buyers in the world of financial institutions are not feeling much pain in terms of premiums hikes.

Based on responses from 110 insurance buyers, Advisen said more than 90 percent of commercial banks, investment banks, mortgage lenders, real estate investment trusts and other companies in the financial services sector have renewed, or expect to renew, their D&O and E&O policies at the same or lower rates.

"We launched this survey when we didn't detect a reaction to the subprime meltdown in the D&O and E&O insurance program data we routinely compile from insurance buyers and brokers," Mr. Bradford said.

"Our informal discussions with brokers support the survey findings," said Tom Ruggieri, Advisen's chief executive officer, in a statement. "Brokers tell us that they may have to work hard, but they are getting tough risks placed with no change in rates or policy conditions."

"Programs with less subprime exposure are seeing significant rate decreases and broader coverage," he added.

Speaking at the Professional Liability Underwriting Society D&O Symposium earlier this month, Bain Head, a broker and senior vice president for McGriff, Siebels & Williams in Houston, said D&O capacity has tightened up for companies directly impacted by subprime.

"There are some very specific sectors where it is hard to find capacity at all," she said, noting that "subprime-related categories" facing capacity issues are expanding daily.

They include credit cards, auto lenders, homebuilders and real estate investment trusts, she said. But even developments at nonfinancial companies are being watched closely by D&O insurers, she added--noting, for example, that Bristol-Myers Squibb recently reported an investment write-down.

On the other hand, even though capacity is constricting, she said broad terms are still negotiable. "For companies that have already been sued, there's a lot of capacity available," she said.

Ms. Head said another market trend that's developing is that insurers are tightening up the authority of individual underwriters to make decisions on any accounts with subprime-related risks, causing a "bottleneck in terms of getting quotes out." The process is slower and "brokers need to prepare clients for that," she said.

(Additional reporting by Daniel Hays)

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