Avian flu liability potential may pose risk to insurance companies
Avian flu poses risk to people, but insurance companies are not immune; a recent Morgan Stanley report says pandemic may undermine financial health of some companies
Should investors get rid of stocks of insurance companies for fear that these companies may be called upon to pay exorbitant avian flu-related damages? This is a question some analysts are starting to consider as the avian flu virus spreads to new parts of the globe. “A severe outbreak could have far-reaching repercussions for a large number of life insurers,” says Morgan Stanley insurance analyst Nigel Dally in a recent report.”
Not all insurance companies are equally exposed, though. The report looked at fourteen public companies, and found that industry giant MetLife and smaller firms such as Reinsurance Group of America (RGA) to be the most exposed to potential losses based on an analysis of the amount of life insurance they have underwritten.”
The 1918 influenza pandemic killed more than forty million people world-wide, and the current avian flu does not appear to have the same destructive potential. The avian flu virus has killed more than 100 people in eight countries since 2003, according to the World Health Organization (WHO). This is fewer than the number of deaths caused by lightning in the United States over an average three years according to National Lightning Safety Institute statistics. To become a global pandemic the virus would have to mutate into one that could transfer easily from human to human. This is considered unlikely, but if it happens, the global consequences could be drastic. A December report by the Congressional Budget Office (CBO) concluded that a severe pandemic could cut real gross domestic product about 5 percent over the following year.”
Some investors are preparing for the worst. “I don’t want to own stocks in the U.S. or anywhere when U.S. GDP goes from plus-five to minus-five,” says David Kotok, chief investment officer for Cumberland Advisors in Vineland, New Jersey. Kotok has more specific advice: If the virus begins moving among humans, we would want to avoid investing in sectors that depend on human-to-human contact such as restaurants, hotels, and travel concerns. He would lean toward sectors that help to circumvent such contacts such as Internet stocks. The Insurance Information Institute, a trade organization, estimates that a 1918-style pandemic could cost the industry $133 billion in additional death claims. According to Morgan Stanley, that amounts to more than half of the industry’s $238 billion in capital, which is an insurer’s assets minus its liabilities. A more modest outbreak could amount to a little less than 15 percent of capital, the report notes. Fitch Ratings estimates that a moderate outbreak could cause additional life-insurance payouts of $18 billion in the United States.”
Some industry insiders, such as Bob Greving, CFO of UnumProvident, say that the Morgan Stanley report overstates the case.
