Guarding Against Earnings Dips - Brief Article

Unexpected earnings slumps are the source of many a financial nightmare. But there's a growing trend in the insurance industry to blunt the impact of such setbacks.

Reliance National, in New York, has introduced a product that insures a company against earnings dips--at least those triggered by events beyond management control. While Reliance stops short of insuring against an actual earnings-per-share number, it covers a broad range of risk factors that could affect operating profit. "We're protecting corporations from operational earning losses due to all perils, other than what's specifically excluded in the contract," explains Jonathan Zaffino, a managing underwriting analyst with Reliance. That "all risk" approach, while it has yet to find a buyer, sets off Reliance's policy from the others out there, he says.

Paul Medini, a partner in the insurance industry practice of PricewaterhouseCoopers, agrees that Reliance is venturing into new territory with its product. "The concept of insuring earnings is unique and very new," he says.

Among the risks covered by the policy are disruptions in demand for a company's products, weather conditions that affect earnings, and events that interrupt the flow of goods between the enterprise and its suppliers. Exclusions in the policy include losses due to restructuring charges, accounting changes, asset or inventory write-offs, legislative action, and the Year 2000 computer problem.

Before a company can obtain the insurance, it must submit to a "mapping" of its risk by Strohl Systems Group. The analysis examines the entire spectrum of risk across an enterprise, from traditional insurable hazards (natural and man-made) to opera tional risks and financial exposures. Zaffino estimates that such a mapping costs, on average, $50,000. Premiums will vary, but Zaffino says that ordinarily they will be less than 25 percent of the policy's capacity.

At least one of Reliance's competitors is skeptical about the originality of the product. "I don't think there's any difference between what we offer now and what Reliance is offering." asserts Tobey J. Russ, president of AIG Risk Finance in New York. The insurer offers a number of policies that cover operational risks that can be combined to achieve the same results as the Reliance product, he says.

COPYRIGHT 1999 CFO Publishing Corp.
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