Economic damage to commercial insurers resulting from the options backdating scandal will be modest, an investment bank forecast today.
Bear Stearns analyst David Small said that conclusion was reached after speaking with several directors and officers liability specialists and both plaintiff and defense attorneys.
He said the bank believes the options backdating scandal will have a relatively modest maximum loss potential for carriers with directors and officers liability policies–$7 billion.
For the past few months, several companies have faced state and federal scrutiny for allegedly granting options to executives with dates stamped before they were granted, giving the options a “strike” price lower than the current share price so as to guarantee their value.
The strike price is supposed to be the day they were granted, but if the share price fell afterward, the option to purchase the share at that price would have no value.
Mr. Small wrote that issues surrounding option backdating have not affected pricing trends, as rates continue to soften.
“Economic damages may be difficult to prove, as the shares of most implicated companies have performed as well as or better than the broader market or relevant indices,” Mr. Small wrote.
In addition, it is still too early to predict how actively the plaintiff's bar will pursue this issue, and how insurers will deal with arising claims, he added.
While those insurers writing primary layers of D&O coverage will be the most affected, they tend to be the larger carriers such as AIG, Chubb and St. Paul Travelers, so investors will in all likelihood have a difficult time spotting the impact, according to Mr. Small.
“We anticipate the most significant effects will be seen in smaller players who tend to write excess covers, but may have opportunistically written primary coverage on a handful of programs,” Mr. Small wrote.
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