D&O insurers avoid heavy losses from banking crisis as Credit Suisse takes $54bn lifeline

D&O insurers have been thrown a lifeline by the US government’s intervention to guarantee full deposits of tech start-up clients at the collapsed Silicon Valley Bank (SVB) and Signature Bank, according to AM Best. The rating agency said D&O claims would have escalated to cause insurers “financial distress” if the government not stepped in.

“Underwriters of directors and officers insurance for startups and venture capitalists, as well as the financial institution insureds supporting such entities, could have faced financial distress given that they are operating on very thin capital,” said David Blades, associate director, industry research and analytics at the rating agency.

“Since startups are by nature much more agile and less risk-averse than other companies, their directors and officers often make decisions quickly. Therefore, the potential for D&O claims for startups would have been high in the case government had decided not to help the depositors,” Blades added.

AM Best said insurers are not heavily exposed to the banking failures in the US but urged them to learn “critical” lessons from the current crisis. Credit Suisse became the first bank to turn to emergency aid to navigate the storm as the European banking sector hit choppy waters.

“The [SVB] failure highlights for insurers the importance of managing enterprise, asset-liability and liquidity risks,” AM Best said. “SVB Financial Group appears to be a casualty of rising interest rates and of insufficient risk management to address the asset/liability issues because of those rising interest rates,” it said.

AM Best said some major bank stocks have seen significant value wiped from their equity portfolios this week in the wake of the collapse of the two US banks, which followed the failure of Silvergate earlier this month. Five US insurers have equity exposure to the banking and trust sector greater than their capital, AM Best said, while 17 have exposures equal to at least half of their capital.

Insurers are less exposed to the risk of impairments on bonds but rising interest rates will impact asset/liability portfolios, it added.

Fitch Ratings agreed that US insurers’ direct exposure to the failed banks is low.

Fitch said rated insurers’ investments in SVB, Silvergate and Signature Bank are modest, at an estimated $1.16bn, with most exposure concentrated among life insurers. But it warned: “Financial system interconnectedness and second-order effects could present short-term challenges.”

Jason Hopper, associate director of industry research and analytics at AM Best, said: “Many insurers depend on banks for operational aspects, but generally are not as vulnerable to bank run-on scenarios, although as we’ve seen in the past they can occur, emphasising the importance of a robust risk management structure, especially for annuity writers in a rising interest rate environment.”

He added: “Insurers that conduct detailed analysis on the impact of rising interest rates on their asset-liability portfolios and manage their impacts through capital and other risk management tools will fare better in those events than those that are less well-managed.”

Fitch said further increases in central bank interest rates would affect bond values, which last year resulted in mark-to-market losses impacting insurers’ shareholders’ equity. “Fitch-rated US life insurers reported an aggregate 59% decline in GAAP basis shareholders’ equity in 2022, primarily related to rising interest rates,” the rating agency said. But it added that insurers would likely be stable enough to hold bonds until maturity rather than sell at an interest-rate driven loss.

Share prices at European banks have had a turbulent week in the wake of the US bank failures. Credit Suisse’s woes were compounded by its disclosure that ineffective risk management had caused “material weaknesses” in internal controls for financial reporting. After its share price nose-dived to a record low on Wednesday, the Swiss National Bank stepped in to shore up Credit Suisse with $54bn of emergency funding. Markets rebounded on this news.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said Credit Suisse became “fragile” as confidence in the bank evaporated and deposits were withdrawn.

“Credit Suisse is the first major bank, deemed too big to fail, to take up the offer of an emergency lifeline… It also highlights the lightning speed of the global fallout of Silicon Valley Bank’s collapse, which has shaken the banking sector, and prompted investors spotting weaknesses in other institutions, to race for the exit,” Streeter said. She added that any bigger run on Credit Suisse would impact other institutions around the world with exposure.

Streeter said the Swiss national bank’s move has restored some stability to stock markets for now.

“Systemic risk to the sector is still considered to be low, as larger banks have built up bigger capital buffers from the financial crisis and have stable deposits, while the coffers of some are believed to have swelled as customers seek out sturdier institutions for their deposits,” she said.