S&P’s Doesn’t See Enron Bankruptcy Having Negative Impact on Ratings

December 7, 2001

The direct exposure of U.S. insurers’ asset portfolios to securities issued by Enron Corp. (Enron) and its affiliates, estimated at more than $3.5 billion as of this date, is not likely in itself to have a negative impact on ratings of those insurers, Standard & Poor’s reported.

The exact total of insurers’ asset exposure will take some time to resolve, because many insurers liquidated some or all of their holdings in the weeks preceding Enron’s bankruptcy filing of Dec. 2, 2001, but S&P’s estimates that most of this asset exposure, about $2.6 billion, was with life insurance companies at year-end 2000, primarily in fixed-income investments.

The portfolio management discipline of domestic insurers in their asset management has become ever more sophisticated in recent years, and for most, a key tenet was the avoidance of excessive exposure to any one credit. This, combined with the maintenance of strong capital redundancies at most companies, has left most U.S. insurers with ample capital cushions to absorb any net losses likely to result.

The insurance industry also has substantial holdings of asset-backed securities, specifically collateralized-debt obligations (CDO), some of which may include Enron-related debt in their underlying assets.

Although a number of synthetic CDOs may undergo downgrades as a result of Enron’s collapse (while the impact on ratings assigned to cash-flow CDOs is expected to be minimal), any exposure of insurance companies by this means is believed to be relatively small, and any impact on the overall quality of insurance assets to be minimal.

However, whatever the effects of this particular credit event on insurance companies’ asset portfolios, S&P’s cautions that it occurs in an environment of generally deteriorating credit quality across numerous industries. The cumulative effects of that environment could eventually have adverse rating consequences for individual insurance companies with proportionately greater exposure to the securities of industries with the most severely affected credit quality.

As yet undetermined is the property/casualty insurance industry’s exposure to Enron through issuance of performance bonds in connection with forward-purchase contracts sold by Enron and its affiliates.

Although a few insurers, most notably Chubb Corp. (with an announced exposure of $220 million), have publicly stated their exposure to such liabilities, the large majority have yet to make public announcement of their exposure.

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