Italy’s Parmalat Collapse Felt in U.S. – $1.6 Billion Says Moody’s

December 24, 2003

The fallout from the collapse of Parmalat, the Italian dairy and food-processing group, is spreading ever wider. With commentators and analysts now calling it “Europe’s Enron,” it will undoubtedly affect U.S. investors, including a number of insurance companies.

According to Moody’s Investors Service, U.S. life companies could lose as much as $1.6 billion worth of investments. However the rating agency isn’t too concerned about their overall strength, – with one exception. Robert Riegel, Managing Director for Life Insurance stated in a press bulletin: “In all but one case these holdings are modest enough that they are unlikely to have any significant ratings effect. “However,” he continued, “AFLAC had a $384 million exposure that equaled 17% of its statutory capital and 1.1% of invested assets; moreover, this exposure has already resulted in AFLAC’s realizing losses of $257 million from the sale of these securities.”

In a move that had been widely anticipated Parmalat’s directors filed for protection from creditors under a specially passed statute. The government passed the legislation not only to help Parmalat, but also to try and save some of the 46,000 jobs that are at risk. Whether the company itself can be rescued remains very problematic.

Recent investigations continue to reveal new instances of fraudulent accounting, non-existent offshore assets and other irregularities. The biggest discrepancy so far concerns an account valued at 3.95 billion euros ($4.9 billion) in the form of an apparently forged letter claiming the money was in a Bank of America account, which the bank says never existed. The total shortfall is now estimated to be as much as $11 billion.

Investigators have indicated that Parmalat’s former auditors, Grant Thornton, were at the least negligent in auditing the company. Deloitte and Touche became its auditors in 1999, and they too are being investigated.

Besides AFLAC, Moody’s listed the following U.S. insurers as having the approximate exposures indicated:
American International Group ($162 million), John Hancock ($117 million), Prudential ($105 million), and Pacific Life ($99 million). Moody’s said it had “identified 27 rated insurance groups that are exposed to Parmalat. Another 47 rated groups had no identifiable exposure to Parmalat-related securities.

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