It looks like the insurance industry wasn’t bluffing.
Shortly after the September attacks, the property and casualty insurers asked Congress to cap losses by promising to pick up terrorist-related claims above a specified level. At first, it looked like the Santa Claus-like legislators were going to deliver.
But alas, an insurance bill was never passed.
And now it seems that companies will be hard-pressed to receive coverage for terrorist-related acts, according to Standard & Poor’s.
The rating agency said Wednesday that several commercial insurers will cut coverage for losses caused by acts of terror, allowing 2001 policies to go unrenewed for 2002.
It also said that the withdrawal of coverage will spread beyond property and aviation insurance to other risks, such as workers’ compensation coverage.
What’s more, insurers still may not write policies that cover terrorist acts even if Congress passes a bill that would help to cap losses, says the rating agency.
“Many insurers will not want to provide significant coverage for terror losses regardless of government action,” said Don Watson, a managing director with Standard & Poor’s Insurance Ratings group, in a press release. “By their nature, terror losses are difficult to price, and the potential concentration within an insurer’s portfolio are such that it would be imprudent for insurers to write coverage without effective reinsurance. And right now, most reinsurers are not willing to provide large policy limits, much less uncapped coverage for terror risk. So some are thinking it’s better just to opt out of terrorism coverage altogether.”
Now, keep in mind that 47 states have already provided some relief from terror exposure, including some exclusions for terror losses. However, in three states– New York, California, and Connecticut–insurance commissioners have not followed the National Association of Insurance Commissioners’ recommendation to allow some exclusions on terror covers, says S&P.
“The concern for insurers writing property/casualty coverage is that these states could mandate insurers operating in their jurisdiction to cover acts of terrorism potentially resulting in unacceptable accumulations of risk for insurers,” it adds in its statement.
However, until Congress passes a bill or states require coverage, the gap in coverage shifts risk back to the corporate, industrial, and real estate markets exposed to the risk, says the agency. This means if insurers simply won’t renew policies that cover terrorist acts to property, businesses that had these kinds of policies will now have to cover the tab themselves.
“The ratings implications for corporates are likely to be very limited and selective,” said Sol Samson, a managing director with Standard & Poor’s Corporate Ratings group, in the press release. “The additional risk may emanate from lack of coverage or much greater expense to obtain coverage. But the impact would be material only in situations where the perceived specific risk of a terrorist incident was high-just as lack of earthquake insurance isn’t a problem in regions that don’t face much risk of such natural events.”
Now, keep in mind that companies won’t be hurt much if they operate many plants and facilities. What’s more, carrying insurance would be moot anyway if it’s for cases that are widely believed to offer high terror risk. “If cruise ships were perceived as targets, who would take cruises? If a landmark building were viewed as vulnerable to terrorist attacks, what rents could it command? Insurance cover for the boat or building wouldn’t resolve the risk exposure,” Samson added.
Watson added in the release that it’s not uncommon for policies to be signed after their effective date. So, gaps would be filled very quickly. Besides, if there is an insurance void, the free market would kick in and brokers may create a pool of funds to offer some form of limited coverage, S&P adds.
Meanwhile, many companies have now witnessed the risk of having large numbers of employees in one location. This means that terror attacks on large corporate sites could easily bankrupt insurers with workers’ compensation claims averaging $1 million or more, says S&P.
Yet, reinsurance capacity for high excess workers’ compensation remains in short supply. “Accordingly, many insurers may elect to cut workers’ compensation coverage with large accounts rather than assume terror risks implicitly,” S&P adds.
Any way you size it, this is a corporate crisis.
Andersen, 50 Others to Receive Subpoenas
The Senate’s Permanent Subcommittee on Investigations on Friday plans to issue 51 subpoenas seeking documents stemming from the collapse of Enron Corp., according to Reuters.
This news comes on the same day that the Justice Department said it had opened a criminal investigation of Enron.
Enron, its auditor Andersen, and 49 individual officers, employees, and members of Enron’s board of directors will receive the subpoenas, says the wire service, citing a committee spokesperson.
Meanwhile, the Senate Committee on Governmental Affairs has scheduled another hearing into Enron for Jan. 24.
Enron, Andersen, and the 49 individuals would have “several weeks” to respond to the subpoenas, the spokesperson reportedly told Reuters.
Accenture Reports Strong Results From Outsourcing
Accenture reported a 45 drop in net profits for the first quarter due mostly to losses in its investment portfolio. The results are in line with the company’s announcement in December.
However, the world’s largest consulting firm said revenues before reimbursements (net revenues) came in at a record $2.99 billion, up 6 percent from the prior year.
“Our continued focus on business transformation helped us achieve 32 percent revenue growth in outsourcing during the quarter,” said Joe W. Forehand, Accenture chairman and CEO, in a statement.
Outsourcing represented 18 percent of the company’s revenues in the first quarter, the company said on its conference call.
Net revenues for Accenture’s Government global market unit were $337 million, up 58 percent from the prior year. Accenture’s Products and Resources global market units reported net revenues of $650 million and $541 million, respectively, increases of 22 percent and 17 percent.
Looking ahead, Accenture said that it is comfortable with analysts’ consensus earnings estimates for the second quarter of fiscal 2002, ending Feb. 28, 2002, and that analysts’ consensus estimates for the remainder of the fiscal year are reasonable.
The mean estimate for the quarter is 21 cents per share and 87 cents for the year, according to First Call.
- Moody’s Investors Service has placed the Baa3 rating on long-term debt of AT&T Canada Inc. on review for possible downgrade. “The action reflects our concern that the company’s weak financial status and lack of regulatory progress in Canada may cause AT&T Corp. to reevaluate its long term support of AT&T Canada,” the rating agency said in a statement.
- Moody’s also lowered the credit ratings for Conseco Inc.’s senior unsecured debt to B2 from B1. It added that the outlook on the company’s ratings remains negative. The rating action concludes a review for possible downgrade that began on November 12, 2001.
“The downgrade reflects the continued uncertainty of the company’s financial flexibility that, according to Moody’s analysis, is already reflected in the market value of Conseco’s debt securities,” it said. This uncertainty has been heightened by the fragility of the current economic environment, which has weakened the profitability outlook of Conseco’s annuity business and its consumer finance operations.”
- DaimlerChrysler AG raised more than $2.8 billion from a sale of dollar- and euro-denominated bonds, up 50 percent from what it had originally sought. DaimlerChrysler didn’t even conduct a “road show” to drum up interest among investors.
- Duke Energy Corp. issued $1 billion in a two-part debt deal, led by UBS Warburg LLC and Wachovia Securities. It sold $750 million of 10-year notes, priced to yield 6.287 percent, or 125 basis points over comparable Treasurys. It also issued $250 million of three-year floating rate notes, priced at 35 basis points over the three-month Libor. It was rated A1 by Moody’s and A-plus by S&P.
- Meanwhile, the IPO market still has not seen its first issue this year. And, on Wednesday, Verizon Communications said at Salomon Smith Barney 12th Annual Entertainment, Media and Telecommunications Conference it is in “no rush” to proceed with its widely anticipated initial offering of its Verizon Wireless joint venture. The reason: Weakness in wireless stocks and the collapse of a deal to buy wireless licenses.
- AMR Research Inc., which provides research and analysis on e- business strategy and technology, on Wednesday withdrew plans for its $75 million IPO due to “adverse” market conditions.