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Barclays Analyst Says Chubb Faces Big Potential D&O Losses

Source: BestWire

Posted on 08 Jul 2009

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An equity analyst predicts that Chubb Corp. may face as much as $2 billion in directors and officers policy losses because of a surge in lawsuits brought on by the U.S. economic crisis. Barclays Capital analyst Jay Gelb wrote in research note to investors that "Chubb does not appear appropriately reserved in this line."

If Chubb's loss ratio rose to a similar peak as the one it recorded in the 2002 technology bubble, Gelb wrote, "we estimate Chubb could report additional D&O losses of $2 billion, pretax over several years.

The vulnerability is due to "the potential for a wave of D&O litigation," Gelb wrote. "Our sense is industry D&O losses could be meaningful in the wake of the financial market dislocations and the recession." And Chubb holds a 15% share of that market -- the third largest -- according to the report, which also suggests the company could be underestimating its loss ratio.

Chubb didn't immediately respond to a request for comment. In a recent comment on the recession, John D. Finnegan, president and chief executive officer of Chubb said, "The economic downturn is affecting our ability to write premium, and that hurts growth (June 15, BestWire).

According to an AMB Credit Report, Chubb's professional liability business -- in the first nine months of 2008 -- incurred an accident year combined ratio above 100, while its calendar year combined ratio, reflecting continued very favorable prior year loss reserve development, was approximately in the mid-80s. A.M. Best said it believes Chubb's exposure to recent systemic events affecting this business -- including the subprime mortgage/credit crisis, weakened global economy and substantial declines in the stock market -- could potentially result in higher frequency and severity of claims related to this business, particularly in the financial services sector.