Industry risk report: telecommunications

Industry risk report: telecommunications

D&O and E&O coverage in this sector is NOT just a phone call away. When insurance buyers finally get through, their concerns seem to fall on deaf ears. Beyond the frustrations of people like Denise Archer at BellSouth, who says she can’t find D&O and E&O coverage at a fair price, the nation’s telecommunications companies have expanded beyond offering local and long-distance services. It’s not unusual for many companies to offer cable, Internet and wireless service, for example. This adds value, the companies say. But underwriters also maintain that it means adding risk, and adding risk also means raising premiums.

VERIZON COMMUNICATIONS New York, NY

Verizon Communication is one of the world’s leading providers of communications services, with approximately $68 billion in annual revenues, Verizon companies are the largest providers of wireline and wireless communications in the United States. Verizon is also the largest directory publisher in the world, as measured by directory titles and circulation. Verizon’s international presence includes wireline and wireless communications operations and investments, primarily in the Americas and Europe.

Chief risk executive: Philip Baumeister, Corporate Risk Manager

CEO: Ivan G. Seidenberg

CFO: Doreen A. Toben

Board audit chair: Thomas H O’Brien

Net revenue: $67,752 million

Net income: $3,077 million

Number of employees: 205,100

Primary broker: Marsh

Captive: Exchange Indemnity Co (Vermont): GTE Life Insurance Co., Ltd. (Bermuda)

Risk exposures include: The duration and extent of the current economic downturn: materially adverse changes in economic and industry conditions and labor matters, including workforce levels and labor negotiations, and any resulting financial and/or operational impact, in the markets served by us or by companies In which we have substantial investments; material changes in available technology; technology substitution: an adverse change in the ratings afforded our debt securities by nationally accredited ratings organizations; the final results of federal and state regulatory proceedings concerning our provision of retail and wholesale services and judicial review of those results; the effects of competition in our markets

Risk strategies: Verizon employs risk management strategies using a variety of derivatives, including interest rate swap agreements, interest rate locks, foreign currency forwards, equity options and basis swap agreements. Objectives include maintaining a mix of fixed and variable rate debt to lower borrowing costs within reasonable risk parameters and to protect against earnings and cash flow volatility resulting from changes in market conditions

SBC COMMUNICATIONS San Antonio, Texas

SBC Communications Inc. is a diversified communications company, owning several of the world’s leading data, voice and Internet services providers Through world class networks, SBC companies provide a full range of voice, data, networking and e-business services, as well as directory advertising and publishing. SBC companies currently serve 55 million access lines nationwide In addition, SBC companies own 60 percent of America’s second-largest wireless company, Cingular Wireless, which serves more than 24 million wireless customers Internationally, SBC companies have telecommunications investments in 26 countries.

Chief risk executive: Julie Long. Director, Risk Management

CEO: Edward E, Whitacre, Jr

CFO: Richard G. Lindner

Board audit chair: Clarence C. Barksdale

Net revenue: $40,813 million

Net income: $8,505 million

Number of employees: 168,000

Primary broker: Aon

Captive: Gateway Rivers Insurance Co. (Vermont)

Risk exposures include: Adverse economic changes in the markets served by us or in countries in which we have significant investments; Changes in available technology and the effects of such changes including product substitutions and deployment costs: Uncertainty in the U.S. securities market and adverse medical cost trends; The final outcome of Federal Communications Commission proceedings and re-openings or such proceedings, including the Triennial Review and other rulemakings, and judicial review, if any, of such proceedings, including issues relating to access charges, availability and pricing of, unbundled network elements and platforms and unbundled loop and transport elements

Risk strategies: Interest rate swap contracts (to control expenses associated with interest rates); SBC makes no use of derivatives for trading purposes or to generate income; The company uses certain derivative financial instruments, including interest rate swaps, foreign exchange contracts, combined interest rate foreign currency contracts, options, forwards and equity hedges to manage market risks such as interest rate and foreign currency risks

AT&T Bedminster, NJ

Backed by the research and development capabilities of AT&T Labs, AT&T is a global leader in local, long-distance, internet and transaction-based voice and data services The company’s primary business segments are AT&T Business Services and AT&T Consumer Services. The company provides an array of services and customized solutions in 60 countries and 850 cities worldwide.

Chief risk executive: Craig Barrel, Director, Risk Management

CEO: David W. Dorman

CFO: Thomas W. Horton

Board audit chair: Jon C Madonna

Net revenue: $34.529 million

Net income: $1,865 million

Number of employees: 61,600

Primary broker: Marsh Captive: American Ridge Insurance Co. (Vermont)

Risk exposures include: the impact of oversupply of capacity resulting from excessive deployment of network capacity; the ongoing global and domestic trend towards consolidation in the telecommunications industry; the availability and cost of capital; the requirements imposed on us or latitude allowed to competitors by the FCC or state regulatory commissions under the Telecommunications Act or other applicable laws and regulations; the risks associated with the repurchase by us of debt or equity securities, which may adversely affect our liquidity or creditworthiness

SPRINT CORP. Overland Park, Kansas

Sprint is a global integrated communications provider serving more than 26 million customers in over 100 countries With approximately 65,000 employees worldwide and over $26 billion in annual revenues in 2003, Sprint is widely recognized for developing, engineering and deploying state-of-the-art network technologies, including the United States’ first nationwide all-digital, fiberoptic network and an award winning Tier I Internet backbone Sprint provides local communications services in 59 states and the District of Columbia and operates the largest 100-percent digital, nationwide PCS wireless network in the United States.

Chief risk executive: Charlotta Duffy, Manager, Risk Management Finance

CEO: Gary D. Forsee

CFO: Robert J. Dellinger

Board audit chair:

Net revenue: $26,197 million

Net income: $1,215 million

Number of employees: 66,900

Primary broker: Beecher Carlson

Captive: Pin Drop Insurance Ltd. (Bermuda)

Risk exposures include: Substantial indebtedness that could affect the implementation of business strategies; the costs and business risks associated with providing new services and entering new markets; adverse change in the ratings afforded our debt securities by ratings agencies; the impact of wireless local number portability (WLNP) on Sprint’s wireless operation’s growth and churn rates, revenues and expenses; the possibility of one or more of the markets in which Sprint competes being impacted by changes in political or other factors such as monetary policy, legal and regulatory changes

Risk strategies: Sprint selectively enters into interest rate swap agreements to manage its exposure to interest rate changes on its debt. Sprint also enters into forward contracts and options in foreign currencies to reduce the impact of changes in foreign exchange rates, Sprint seeks to minimize counterparty credit risk through stringent credit approval and review processes, the selection of only the most creditworthy counterparties, continual review and monitoring of all counterparties, and thorough legal review of contracts. Sprint also controls exposure to market risk by regularly monitoring changes in foreign exchange and interest rate positions under normal and stress conditions to ensure they do not exceed established limits

BELLSOUTH Atlanta, GA

BellSouth Corporation is a Fortune 100 communications services company headquartered in Atlanta, GA, serving nearly 50 million local, long distance, Internet and wireless customers in the United States and 12 other countries.

Chief risk executive: Denise Archer (Casualty Risk Manager) & Dennis Baltz (Property & Loss Control)

CEO: F. Duane Ackerman

CFO: Ronald M. Dykes

Board audit chair: William S. Stravropoulos

Net revenue: $22,635 million

Net income: $3,904 million

Number of employees: 76,000

Primary broker: Marsh

Captive: Campanile Assurance Line Ltd. (Vermont)

Risk exposures Include: Changes in domestic & foreign markets, changes in U.S. laws and regulations; the increasing competition within the telecommunications industry; pending litigation; deterioration of currency exchange rate in countries in which they operate, particularly Latin American countries

Risk strategies: Use of derivatives such as interest rate swap agreements, foreign currency forwards and currency swap agreements; Also actively monitors the creditworthiness of counter parties to protect against credit risk exposures resulting from these derivatives; continuing efforts to use up-to-date technology to stay competitive

COMCAST CORP. Philadelphia, PA

Comcast Corporation is principally involved in the development, management and operation of broadband cable networks and in the provision of programming content. The company is the largest cable company in the United States, serving more than 21 million cable subscribers. The company’s content businesses include majority ownership of Comcast Spectacor, Comcast SportsNet, El Entertainment Television, Style Network, The Golf Channel, Outdoor Life Network and G4.

Chief risk executive: Kathleen Coupe, Risk Manager

CEO: Brian L. Roberts

CFO: Lawrence S. Smith & John R. Alchin

Board audit chair: Kamal Dua

Net revenue: $18,348 million

Net Income: $3,240 million

Number of employees: 68,000

Primary broker: Withheld Captive: No

Risk exposures include: Changes in interest rates and other credit risks associated with derivative transactions; market risks like changing of equity prices of investments; pending litigation concerning investment relationship with At Home Corporation; changes in laws and regulations; changes in competitive environment; industry consolidation and mergers

Risk strategies: Fixed & variable rate debt and derivative transactions (to manage volatile interest rates); evaluation of creditworthiness of counter parties to minimize exposure to subsequent credit risks; interest rate swaps and lock agreements, and interets rate cap and collar agreements to manage market risk of changing interest rates and any resulting adverse effects

AT&T WIRELESS SERVICES Redmond, WA

AT&T Wireless is a leading provider of advanced wireless voice and data services for consumers and businesses. Operating one of the largest digital wireless networks in North America and the fastest nationwide wireless data network in the United States, AT&T provides customers with high-quality mobile wireless communications service both in the U.S. and internationally.

Chief risk executive: Craig Bartol, Director, Risk Management

CEO: John D. Zeglis

CFO: Joseph McCabe, Jr

Board audit chair: John W Madigan

Net revenue: $16,695 million

Net income: $442 million

Number of employees: 31,000

Primary broker: Withheld Captive: No

Risk exposures include: Regulations and changes implemented by the FCC and Communications Act of 1996; uncertainty surrounding merger with Cingular Wireless; adverse effects of wireless local number portability; failure to update and install information systems to support network technology; uncertainty about current roaming agreements; expected increased debt in the future, equipment failure, power outages; terrorist activities, tax liability as a result of split-off/separation from AT&T consolidated tax return group

Risk strategies: During 2003, the company launched a company-wide initiative known as “Project Pinnacle” in an effort to improve operating efficiency and margins; From time to time, we may use certain derivative financial instruments, primarily interest rate swaps, to manage our interest rate risks

QWEST COMMUNICATIONS Denver, Co

Qwest Communications International Inc. provides local telecommunications and related services, IntraLATA and InterLATA long-distance services and wireless, data and video services within our 14-state local service area. Qwest also provides long-distance services and reliable, scalable and secure broadband data, voice and video communications outside of their local service area, as well as globally.

Chief risk executive: Alyson Buchanan, Director, Risk Finance, Insurance & Claims

CEO: Richard C. Notebaert

CFO: Oren G. Shaffer

Board audit chair: Peter Hellman

Net revenue: $14,288 million

Net income: $1,818 million

Number of employees: 47,000

Primary broker: Marsh

Captive: Western Re Inc (Vermont)

Risk exposures include: Pressures on profit margin as a result of increased industry competition; downturns in economy of local service area; changes in technology requiring additional financial and resource expenditures; pending investigations by the SEC and U.S. Attorney’s Office into certain accounting practices and transactions; major lawsuits concerning these accounting issues

Risk strategies: Attempts to manage exposure to volatility of interest rates through financial derivatives; customer service initiatives such as simplified billing and expanded product bundling to distinguish from competition; development and acceleration of new products such as broadband data and wireless services to keep up with developing market technologies; the objective of the interest rate risk management program is to manage the level and volatility of our interest level

NEXTEL COMMUNICATIONS Reston, Virginia

Nextel Communications is a leading provider of fully integrated wireless communications services and has built the largest guaranteed all-digital wireless network in the country covering thousands of communities across the United States. Nextel and Nextel Partners Inc. serve 295 of the top 300 U.S. markets where approximately 252 million people live or work.

Chief risk executive: Richard Burnheimer, Senior Director, Risk Management

CEO: Timothy M Donahue

CFO: Paul Saleh

Board audit chair: Stephanie M Shern

Net revenue: $10,820 million

Net income: $1,530 million

Number of employees: 17,000

Primary broker: Withheld

Captive: No

Risk exposures Include: Substantial indebtedness greatly exceeding cash on hand and cash flows, which may limit the company’s ability to compete in a changing industry; ability to expand and upgrade network and gain or retain new customers; continued price reductions due to competition in the telecommunications marketplace; FCC regulations affecting operation and long-term business plans

Risk strategies: The company occasionally uses financial derivatives to manage interest rate risk, primarily consisting of interest rate swap agreements

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