Us D&O floods into Lloyd's

The collapse of WorldCom and Enron means Lloyd's underwriters must be more vigilant than ever, said a leading underwriter.

US directors' and officers' (D&O) risks are now pouring into the London Market.

Hiscox professional indemnity (PI) underwriter Chris Hill warned that changes in the D&O climate are making underwriters' jobs far more difficult.

"The effect on the Lloyd's Market can be double-edged, in the sense that we are seeing more risks, but have to watch out for adverse risk selection - unfavourable risks being passed to us because US domestic underwriters have declined to renew," he said.

Capacity will decline further, rates will double again in this class and cover terms will narrow, Hill said.

He said rocketing rates do not necessarily mean improved profits, due to the extreme volatility of the class.

D&O legal expert Ed Smerdon of law firm Reynolds Porter Chamberlain said that, despite difficult conditions, UK underwriters are unlikely be frightened away from writing US D&O, but would be "increasing the premiums dramatically for certain sectors such as telecomunications, media companies and dotcoms".

With insurers occupying two of the top three places in WorldCom's shareholder league table, the industry was bracing itself for some hefty hits.

AXA is listed as the largest single institutional shareholder in WorldCom, with Allianz in third place. But all insurers saw their share values battered in the immediate aftermath of the discovery of fraud in the US's second largest telecommunication company.

WorldCom revealed last week that $3.8bn (£2.5bn) of expenses had been improperly booked as capital expenditure, boosting cash flow and profit over the past five quarters.

AXA and Allianz both lost about 6% of their share value. Reports that insurers held a sizeable chunk of WorldCom's $35bn (£23bn) of debt securities saw Royal & SunAlliance, Munich Re and Aviva follow them into decline.

Dutch insurer Aegon confirmed it had $200m (£131m) of exposure, while UK life assurer Prudential said it had $150m (£98m) in corporate bonds.

Munich Re, the worlds biggest reinsurer, said it was exposed to about $80m (£52m) from WorldCom shares or bonds - 0.05% of its $160bn (£105bn) portfolio.

AXA said its exposure amounted to about ¤40m (£26m), mainly in fixed income securities.

In spite of the exposure, insurance stocks recovered most, if not all, of the value they had lost.

Paul Waterhouse, director of financial services at ratings agency Standard & Poor's, said rating downgrades in the insurance sector looked unlikely.

When the news broke, S&P had downgraded WorldCom to a single B rating and was considering cutting it further.

Waterhouse said if any insurer was hiding a big exposure to WorldCom, it would have been taken into account in the ratings process.

"Even with a large exposure we wouldn't expect that to affect solvency," he said.

Fitch Ratings warned that if there is downward pressure on insurers' ratings, it could be among the professional liability underwriters who may have WorldCom D&O against negligence.

Insurers will not have to pay out if the staff involved are found guilty of fraud.