Had the federal government not stepped in to make Silicon Valley Bank (SVB) depositors whole, providers of directors and officers insurance for startups and venture capitalists — as well as financial institutions supporting these entities — would have been staring at potentially significant claims, according to commentary from AM Best.
“Since startups are by nature much more agile and less risk-averse than other companies, their directors and officers often make decisions quickly,” said David Blades, associate director, industry research and analytics, AM Best. “Therefore, the potential for D&O claims for startups would have been high in the case government had decided not to help the depositors.”
A securities class-action lawsuit has already been filed against the bank’s parent, SVB Financial Group as well as its CEO and CFO.
SVB catered primarily to higher-risk tech startups, which have been hurt by higher interest rates and dwindling venture capital. As interest rates rose, venture capitalists found it difficult to access funding and the firms pulled deposits from the bank. SVB tried to sell some bonds it purchased with deposited funds, but the bonds had lost value due to the increase in interest rates. Other clients saw the sale and began withdrawing money, causing a run on the bank. State regulators took over Santa Clara, Calif.-based SVB on March 10, with the Federal Deposit Insurance Corporation (FDIC) stepping in as receiver soon thereafter while promising that all deposits will be made whole.
AM Best’s commentary was issued as a warning to the insurance industry. SVB’s downfall “highlights the critical importance of enterprise risk management, asset/liability management, and liquidity profiles” during a period of rising interest rates, it said.
U.S. insurers have “relatively minimal exposures to SVB bonds,” AM Best’s analysis concluded. Eight U.S. insurers have bond exposures greater than 2 percent of their capital and surplus, with the maximum being less than 5 percent, the insurance industry rating agency added.
Fitch Ratings similarly concluded low exposure for U.S. insurers but added that “financial system interconnectedness and second-order effects could present short-term challenges.”
“The ramifications for equity portfolios could be more significant,” AM Best said, “as some major bank stocks already have lost significant value. Five U.S. insurers have equity exposures concentrated in the broader bank and trust sector greater than their capital, and 17 have exposures totaling at least half their capital.”
AM Best said the issues SVB faced are not unlike those faced by banks financing risky proposition such as cryptocurrency-related companies. On March 12 the FDIC also took over New York’s Signature Bank, a lender in the crypto industry, after depositors fled. New York’s Department of Financial Services has said the bank’s takeover had nothing to do with crypto. However, reports have surfaced that federal prosecutors had been investigating the bank, which has already been hit with an investor lawsuit as well.