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 Friday, 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 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 has ballooned also.
Mr. Small's report also noted that 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.
In the most recent analysis, as in the September report, Mr. Small 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).
Although this set of calculations produced a worst-case figure of $9.3 billion, the lower 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 that 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 this scenario is a "reasonable example of what could come from other financial institutions."
Insurance experts speaking at the Professional Liability Underwriting Society international conference last year 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 both D&O and E&O ("errors and omissions" or professional liability) insurers, experts said.
Separately, in an interview with National Underwriter last week, Scott Carmilani, chairman and chief executive officer of Bermuda-based Allied World Assurance Company, predicted in general that D&O insurance losses related to subprime issues will likely outweigh E&O insurance losses.
While "it's an equal issue for both [coverage] parts"–D&O and E&O–Mr. Carmilani said that "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 research report attempts to identify insurance companies with the greatest exposure. Applying market shares to the overall worst-case figure, the report identifies both American International Group and XL as having more than $1 billion of exposure.
The report goes on to list ACE and Chubb as having worst-case exposures of roughly $741 million and Lloyd's, CNA and Travelers as having worst-case exposures of about $649 million.
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