D&O Losses from subprime to be $3.6b

D&O insurers are likely to suffer $3.6 billion in subprime-related losses.

David Small or Bear Stearns has estimated $9.3b as a worst-case D&O scenario. As I posted here and here, David uses a sensible methodology to generate this estimate.

Advisen is able to generate an estimate of what is likely versus what is worst-case. Based on historical securities class action settlement patterns and D&O program limits and retention data from Advisen’s Program Benchmarking database, data sets available only to Advisen allow us to generate this estimate.

Advisen will publish a report (see press release here), “The Crisis in the Subprime Mortgage Market and Its Impact on D&O and E&O Insurers,” on Monday, February 11 which covers how we arrive at $3.6b and details:

• An updated list of subprime writedowns reported by more than 120 financial institutions across the globe,
• Market cap losses experienced by those companies,
• Subprime-related lawsuits filed against those companies,
• An analysis of the 181 subprime-related lawsuits,
• Advisen’s forecast methodology for subprime D&O and E&O losses,
• Market share of the top ten writers of financial institution D&O and E&O,
• The contribution of subprime losses to 2007 and 2008 loss ratios, and
• The impact of the subprime meltdown on D&O and E&O pricing based on program data reported by risk managers and brokers, and on the results of a survey of 110 financial institution insurance buyers.

“The Crisis in the Subprime Mortgage Market and Its Impact on D&O and E&O Insurers” is available to subscribers of the full Advisen information platform for $200, and to non-subscribers for $500 by calling Advisen at 212.897.4800, or emailing support@advisen.com in the US, or +44 (0)20 7929 6929 or london@advisen.com in the UK.

Subprime investigator finds an informant

The Insurance Insider's coverage of Advisen's survey results yesterday (story here) included a mention to a story I hadn't seen:

Clayton Holdings, which provided due diligence to banks on some of the home
loans they turned into bonds, has agreed to co-operate with Andrew Cuomo in
exchange for immunity from prosecution.

Clayton describes itself on its website as "an information and analytics company serving lenders, loan buyers & bond issuers, servicers and fixed income investors in mortgage-related loans and other debt instruments".

According to an article in Advisen "Sources say one key issue AG Cuomo is looking at is underwriting "exceptions" granted by project managers working for Clayton on Wall Street accounts." Despite a share price drop of 87% since the beginning of the subprime crisis (see chart below), we are not aware of any lawsuits against Clayton.

The majority of subprime cases as tracked in Advisen's large loss database deal with not adequately disclosing and/or misrepresenting the nature of loans and CDOs. Evidence that firms knowingly did so would be a major boost to plaintiffs in subprime cases and increase the potential exposure for the D&O industry. This will certainly be tracked in the news including Advisen Front Page News.

Underwriters fighting an uphill battle

Prices for commercial insurance, notably for Directors & Officers liability coverage, move in a predictable cycle.

In today's market, D&O claims frequency and severity are both down and as a result, underwriting profits are up despite falling prices. These profits have enticed a rush of money into underwriting creating an imbalance of supply & demand.

With the subprime crisis resulting in $200b in write-downs and 178 lawsuits so far, it is only a matter of time for the inevitable impact on the D&O and E&O industry. A handful of claims notifications have been made already but the story is still playing out in the financial markets and not yet in the insurance industry.

Advisen monitors and reports on premium trends in North America, both on behalf of the Risk and Insurance Management Society as the administrator of the RIMS Benchmark Survey™, and in Advisen.com. Our data showed that, despite having had 9 months to digest subprime, renewal pricing for D&O and E&O for financial institutions is falling just as it is for other industry sectors.

To confirm the findings of the empirical data collected from risk managers and brokers, we conducted a survey of financial institution insurance buyers. The results of the survey are available here and contain details on financial sector price trends and an unexpected trend in the terms of coverage.

Later this week Advisen will publish a more comprehensive analysis of the potential impact of the subprime mortgage crisis on the insurance market, covering reported write-downs to-date, subprime-related lawsuits filed to-date, an analysis of potential losses to the insurance market, and estimated market share of the major writers of financial institution D&O and E&O. To obtain a copy, call Advisen on +44 (0)20 7929 6929 or london@advisen.com in the UK or +1.212.897.4800, or emailing support@advisen.com in the US.

Subprime lawsuits now over 175

Updating a previous post (here) about the total number of lawsuits related to the subprime crisis, Advisen now tracks 177 cases, which includes 52 Securities Class Action cases. The pace of new filings is showing no signs of abating. Even the FBI is getting involved, see story here.