According to a new report by A.M. Best, the bankruptcy of Houston-based energy trader Enron Corp. has affected the investment portfolios of a number of insurers. As of Sept. 30, 2001, the affected companies had more than $3 billion worth of investment exposures. According to the Best study, property casualty insurers reported a market-value investment of $604 million for that period, the majority of which was in Enron corporate bonds.
Companies with the largest exposures include Swiss Re, which faces estimated losses of $31 million from Enron bonds in its portfolio. The reinsurer also has a $28 million exposure through its portfolio of credit default swaps.
Other major insurance companies with exposures include Hartford Financial Services, St. Paul Cos., and Reinsurance Group of America Inc.
Property/casualty companies could face losses in two areas in particular: surety bonds and directors & officers liability. Karen Horvath, vice president of property/casualty ratings at A.M. Best, explained, “The effects on the surety bonds and the D&O liability – at this point we have not quantified the total. And certainly, insurers are having losses… Whether the surety bonds actually get paid or not, I think, is going to play out through the courts.”
Horvath continued, “With the D&O, defense is within the limits. Unless they prove fraud and criminal acts, there’ll be coverage there because criminal acts are excluded from the policy. But because defense is within the limits, the defense will certainly cause a loss there. Insurers are reserving for that in their 2001 reserves.”
Because carriers are only just beginning to evaluate their exposures, however, their losses could continue through 2002. “I would think that it’s likely that companies will see some development there in 2002,” Horvath said. “It’s unclear at this point if the reserves that companies are putting up are for limits or just their best estimates of what the losses are going to be… I would not be surprised to see some additional development in 2002.”
As for the Enron bankruptcy’s effects on the D&O market in general, Horvath said, “The greater impact that’s occurring because of these losses is really what’s happening in the marketplace for D&O liability in particular. Rates were firming in that line of business prior to the Enron losses because results had been deteriorating. Nevertheless, the Enron loss did for D&O what Sept. 11 did for property – it just accelerated an already existing trend of price firming and tightening of terms and conditions.”
Horvath indicated that the outlook for the surety bond market is very similar to that for D&O. “I’d say the same thing in the surety bond market. I think companies are probably looking at what exactly they’re considering surety bonds. Somehow it was suggested that this was more of a financial guarantee type of insurance, when it was intended to be a surety bond, so they need to look a little bit more closely at what they’re writing.”
Once year-end 2001 data becomes available, A.M. Best plans to update the report.
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