Katrina's Squeeze on Insurers


Insurance industry estimates for total insured losses from Hurricane Katrina are currently in an unusually wide and fast-evolving range -- about $25 billion to $60 billion. But Standard & Poor's remains skeptical about the reliability of any of these numbers. At this point, we can say with confidence only that projected losses have increased sharply from initial estimates.

S&P has evaluated personal lines, commercial lines, and reinsurance companies as well as bond insurers and mortgage insurers. On Sept. 9, Standard & Poor's Ratings Services placed on CreditWatch with negative implications its ratings on 10 rated insurance and reinsurance groups with exposure to the catastrophic and unparalleled losses stemming from Hurricane Katrina (see list). The ratings on insurers with potential losses that were within expectations haven't been placed on CreditWatch at this time.

Relative to the respective ratings, the companies placed on CreditWatch have sufficient risk-management and risk-mitigation skills, capital, and liquidity to accommodate the losses they're likely to incur. However, an unusually high degree of uncertainty exists in assessing the magnitude of the claims they might be facing, and the standard models used in the industry for predicting catastrophic losses from hurricane scenarios might not have captured all of the related risks now in play. As most companies relied heavily on those models to price their policies and manage their risk, insurers and reinsurers with the greatest exposure generally aren't yet able to fully assess the magnitude of their potential losses.

At present, we believe that the bulk of these risks will have the greatest impact on commercial-lines insurers and reinsurance providers. Personal lines companies will experience substantial losses as well.

NO CERTANTIES. S&P also considered its ratings on life-insurance and health-insurance lines. However, few rated life and health insurers have significant concentrations of risk to the affected markets, primarily because of their overall geographic diversity or focus. Although there will be some business disruption, lowered sales, higher expenses, and perhaps even insured losses, taken in context to the overall earnings and financial strength at most rated firms, no ratings are likely to be affected.

The CreditWatch placements highlight the continued material uncertainty in accurately quantifying the insurance industry's ultimate exposure. However, downgrades are not inevitable. S&P will be meeting shortly with the managements of the companies placed on CreditWatch and expects to resolve the status of most of today's listings within 90 days. The status of the ratings on several companies, though, could take longer to resolve.

Moreover, the overall situation remains sufficiently uncertain that further exposure to unforeseen risks could develop, necessitating further CreditWatch placements.

WHICH COMPANIES. The list of insurers and reinsurers with ratings that were placed on CreditWatch with negative implications follows. Assuming additional capital isn't raised, as losses grow, greater quantities of ratings will be lowered, and the ones that are affected will be lowered by more notches:

ACE (ACE): Its ratings (counterparty credit rating, BBB+) were placed on CreditWatch negative because earnings expectations might not be met based on the uncertainty and amount of Hurricane Katrina losses. If S&P decides to lower the rating on ACE, it's not expected that this rating will be lowered by more than one notch.

Allmerica Financial (AFC): The decision to place the ratings on Allmerica Financial (BB) and its property/casualty affiliates on CreditWatch is based on its significant exposure in Louisiana, particularly in the homeowners and commercial multi-peril lines. If actual insured losses from Katrina are substantially higher than current industry estimates, then Allmerica's net loss could have a material adverse impact on its capitalization.

Allstate (ALL): The decision to place all ratings on Allstate (A+) on CreditWatch with negative implications was based on the high degree of uncertainty regarding the company's potential loss exposure due to Hurricane Katrina's devastating affect in Louisiana, Mississippi, and Alabama. In addition, Allstate does not have reinsurance protection in these states.

Society of Lloyd's: The CreditWatch placement reflects the uncertainty of the scale of the impact of Hurricane Katrina on Lloyd's (A), the specializations of which include the insurance and reinsurance of offshore energy installations, property damage, and business interruption. Since Lloyd's is a market, it is in the process of collecting, validating, and aggregating information from each of its syndicates and will publish estimates when this process is complete.

Katrina will give rise to issues that include gross claim estimation, reinsurance recoverability, and liquidity. Standard & Poor's does not expect the solvency of the market to be impaired, however. Standard & Poor's will meet with management to resolve the CreditWatch placement. If, upon resolution of the CreditWatch placement, Standard & Poor's decides to lower the ratings on Lloyd's, it's not expected that they will be lowered by more than one notch.

Montpelier Re Holdings (MRH): The ratings on Montpelier (BBB) were placed on CreditWatch negative to reflect the material uncertainty in quantifying the insurance industry's Katrina loss, for which Montpelier -- as a predominantly property-reinsurance underwriter with a significant portion of its book in property catastrophe and risk excess lines -- is exposed to a level of loss somewhat greater than many of its more diversified peers.

Montpelier's capital adequacy, even after factoring in a major catastrophic event, is considered strong. However, the uncertainty of ultimate Katrina losses, in combination with the ongoing potential for additional catastrophes, raises the possibility that Montpelier's competitive and financial profile could be adversely affected by an imbalance between its capital base and prospective business opportunities.

Oil Casualty Insurance: The decision to place the ratings on Oil Casualty (A-) on CreditWatch with negative implications was primarily driven by the substantial degree of uncertainty regarding potential loss exposure from the company's shareholders/policyholders. The company's customer base, which consists of companies in energy-related businesses, might be subject to losses stemming from Hurricane Katrina.

PXRE Corp. (PXT): The placement of the PXRE ratings (BBB) on CreditWatch negative reflects the material uncertainty in quantifying the insurance industry's ultimate exposure, for which PXRE -- as a predominantly catastrophe-focused underwriter -- is exposed to a level somewhat greater than more diversified multiline peers. Although PXRE's capital adequacy, even after factoring in a major catastrophic event, is considered strong, the uncertainty of ultimate Katrina losses, in combination with ongoing potential for additional catastrophes, raises the potential that PXRE's competitive and financial profile could be adversely affected by an imbalance between its capital base and prospective business opportunities.

State Farm: The decision to place the State Farm ratings on CreditWatch stems from its significant market share in the affected areas, combined with a high degree of uncertainty surrounding the current estimates of losses. Partially offsetting these uncertainties are the company's extremely strong balance sheet and earnings.

Swiss Re (SWCEY): The CreditWatch placement reflects the impact of Hurricane Katrina on 2005 earnings in the context of Standard & Poor's existing concerns over Swiss Re's ability to post an operating performance that's consistent with the AA ratings. If, upon resolution of the CreditWatch placement, Standard & Poor's decides to lower the ratings on Swiss Re, it's not expected that they will be lowered by more than one notch.

United Fire Group (UFCS): The CreditWatch placement reflects the uncertainty in determining the ultimate exposure to Katrina-related losses of United Fire & Casualty and its subsidiaries. The company's current catastrophe program provides limited protection to the balance sheet and earnings from losses in excess of $10 million, up to $115 million. Nevertheless, if losses exceed $125 million, both capitalization and earnings will be negatively affected and could trigger a ratings action. From Standard & Poor's Ratings Services


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