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Subprime financial losses expected to be huge, but mitigating factors may temper insurance losses


May 16, 2008   by Canadian Underwriter


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Projected to be bigger in scope than the savings and loan crisis in the late 1980s and early 1990s, the subprime mortgage and credit derivative fiasco currently embroiling the United States is merely in its infancy, panelists told people attending a PLUS Canada seminar in Toronto.
Initial estimates have projected the value of insurance claims arising out of the U.S. subprime mortgage issue to be in the neighbourhood of between Cdn$3 billion and Cdn$9 billion.
Thus far in 2008, panelists told people attending the PLUS Canada seminar, 79 class action lawsuits related to subprime have been launched in the United States.
These early lawsuits represent only be the tip of the iceberg, panelists noted. “There have been losses, but we are very, very early in the game,” said Kevin LaCroix of Oakbridge Insurance Services, based in the United States. “If you see [subprime] as a nine-inning game, we are only in the first inning.”
In many cases, companies have not yet declared the losses or write-downs related to the subprime crisis. These public financial statements would normally trigger the kinds of lawsuits that lead to insurance claims, speakers observed.
Arturo Cifuentes, the managing director of R.W. Pressprich & Co. in New York, New York, said the financial instruments used to repackage subprime mortgage loans into credit derivatives are almost “mind-numbing” in their complexity, which could lead to protracted litigation and large-scale costs.
Also, LaCroix noted, there is a “war of all against all,” in which shareholders are suing companies, and financial organizations are suing each other for their role in the financial losses arising out of subprime.
But while the subprime issue is expected to lead to a large number of losses, many of the estimates of insurance losses related to subprime to date have been “almost irresponsible,” LaCroix noted.
Panelists cited a number of factors that could mitigate the number and value of insurance claims:
some cases might be thrown out of court;
many banks in the United States have only Side A coverage for D&O claims, and so insurance claims in these situations would only be triggered in the event of a bankruptcy related to subprime. Side A does not typically cover litigation against boards or individual directors.
in Canada, subprime-related instruments account for only 5% of Canadian companies’ financial portfolios, representing a total value of less than Cdn$10billion. In the United States, on the other hand, subprime-related credit instruments account for 22% of company portfolios, with a total value estimated at about UD$570 billion.


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