debacle affects US insurers: S&P
10 July 2002
the dominoes of Corporate America continue to topple, the
insurance industry will rue the cost of picking up the pieces,
say Standard & Poors (S&P) analysts.
though the demise of WorldCom Inc presents no immediate
ratings consequence, it is symptomatic of an ongoing trend
that spells downgrades for insurers, not just from investments
gone sour but from reimbursements of top company executives
facing liability payments.
The WorldCom exposure
is part of a wider problem, says S&P director Jack
Reichman. Theres potential for death by a thousand cuts.
According to S&P estimates, US insurers held $7.3
billion in WorldCom investments at yearend 2001. Although
no single insurer has enough exposure to warrant a rating
change, the accounting sins of this MCI Communications
Corp affiliate are merely the latest salvo in a barrage
of scandals and high-profile bankruptcies to hit financial
markets since late 2001.
The headlines springing
from that Pandoras box include Adelphia, Dynegy, Kmart,
Global Crossing, ImClone, Qwest, Rite Aid, Tyco International
Ltd., Vivendi Universal, and Xerox.
In the case of Tyco, insurers held $7.0 billion worth
of investments at yearend 2001. Reichman estimates insurer
losses on WorldCom and Tyco instruments at $6.3 billion
and $2.7 billion, respectively, in the first half of 2002
(assuming no accumulation or disposal of these holdings
in that period).
But these losses may be the tip of an ugly iceberg. Although
an individual credit weakening does not create a problem
in itself, the insurance industry is vulnerable to the
cumulative impact of a general credit-market meltdown,
S&P managing director Jay Dhru.
So far, life insurers have shown the greatest exposure
to losses on investments, but other insurance sectors
are not immune, says S&P managing director Bob Partridge.
Property and casualty companies build investment returns
into their pricing, so these developments have muddied
the waters for them, too.
Some property and casualty companies are also increasingly
vulnerable in their coverage of directors and officers
liability (D&O). S&P warned, in its midyear 2002
outlook on the industry, of the ferocious assault insurers
are facing from various forms of professional-liability
coverage and that the industry is ill-prepared for the
escalating pressures it could face.
Again, although any D&O payments triggered by WorldCom
negligence are not a significant concern for any single
insurer, they are part of an all-too-familiar pattern
of systemic exposure. Our concern about D&O exposure
is increasing, says Dhru.
Insurers can and do mount resistance to D&O payouts
where they allege the liability arises from fraudulent
practices by company executives, but S&P analysts
argue that underwriters are unlikely to emerge unscathed.
There will be settlements, says Partridge, who explains
that insurance companies cannot provide protection against
illegal activity. D&O covers negligence or mismanagement.
If you do something stupid, youre covered, but if you
do something illegal, youre not.
the rotten apples multiply in Corporate Americas barrel,
S&P, according to its officials, will continue to
monitor closely the effects on insurers investment portfolios
and exposures arising from professional-liability coverage,
but before the gangrenous spread of accounting mischief
has run its course, the industry will likely see some
List of reports on WorldCom