Downgrades Loom As Katrina Loss Grows

With insured damages as high as $60 billion, rating agenciesraise concerns

By Daniel Hays and Caroline McDonald

With modeling firms continuing to hike insured loss estimatesfor Hurricane Katrina to as high as $60 billion, rating agenciesput personal lines giants Allstate and State Farm, along with otherkey insurers and reinsurers, on notice for a possible storm-relateddowngrade.

Risk Management Solutions announced that Katrina could costinsurers anywhere from $40-to-$60 billion--of which $15-to-$25billion is related to the flooding in New Orleans. "The finalinsured loss from Hurricane Katrina will depend on how flood claimsare apportioned among the National Flood Insurance Program, privateinsurers and individuals," according to the Newark, Calif.-basedRMS.

"Insurers can also expect deterioration losses in houses thatare abandoned for a long period of time, and losses from fires andlooting [in flooded New Orleans], where it could take months todrain the water and fully assess the level of structural damage, aswell as the contamination in the soil and ground water," RMSadded.

"This is the first urban flood that has affected such a vast andindustrialized region. Without benchmarks, authorities have littleexperience to inform them of the levels of contamination to expectonce the waters recede, or how long it will take before the regioncan be inhabited again," said an RMS vice president, LaurieJohnson.

Meanwhile, Fitch Ratings--in addition to Allstate and StateFarm--put a Rating Watch Negative on Horace Mann Educators Corp.,Montpelier Re Holdings Ltd. and PXRE Group Ltd., based on"potential large loss exposures to Hurricane Katrina."

Allstate and State Farm were also put on watch by Standard &Poor's, along with ACE, Allmerica, Montpelier Re Holdings Ltd., OilCasualty Insurance Ltd., Swiss Re and United Fire & CasualtyCo.

Montpelier Re, Oil Casualty and PXRE, all of Bermuda, were alsoplaced on watch by Moody's Investors Service.

Everest Re Group said its losses could amount to 1 percent ofthe total insurance industry's losses--from as much as $600 millionto as little as $220 million. Everest Re CEO Joseph V. Taranto saidthat while the impact is significant, "it is within our riskmanagement tolerance and does not change our positioning orunderlying fundamental financial strength."

XL Capital said its Katrina net loss could hit 1.75percent--between $385 million and $1.05 billion. XL said lossadjustment for what it believes could be the industry's most costlycatastrophe will be protracted, and its estimate is subject torevision. The company said its other third-quarter catastrophes,including European floods, will be about $80 million. (XL stillanticipates a profit for the year and "expects no fundamentalchange in our risk appetite," said XL CEO Brian M. O'Hara.)

ACE Ltd. put its loss range at between $450 million and $550million, and like XL, said it would not know losses with certaintyfor some time to come, "due to the size and complexity of the stormand flooding..."

Moody's said it placed the rating of PXRE Capital Trust underreview because of the company's announcement of its net loss fromHurricane Katrina at about $235 million. Moody's noted PXRE'sstatement that it expects to report a net loss of $85-to-$100million for 2005, assuming no additional material catastrophes thisyear.

Moody's said its review will consider the degree of uncertaintysurrounding current loss estimates given the unusualcharacteristics of Katrina, as well as the prospect for variousdisputes--including the extent to which retrocessional coveragewill respond. Moody's said Montpelier Re Ltd. and Montpelier ReHoldings Ltd. were put under review after the company estimatedKatrina impact in the range of $450-to-$675 million.

The rating action on Oil Casualty, Moody's said, stemmed fromits potential to incur significant losses from Katrina due to thecompany's exposure to oil, gas and energy-related property damageclaims of its members in the Gulf of Mexico and along the U.S. GulfCoast.

Oil Casualty's maximum exposure to Katrina losses is capped at$1 billion due to the company's aggregate limit for losses arisingfrom one event, noted Moody's. However, the rating agency said suchlosses will further weaken Oil Casualty's $1.8 billioncapitalization, which sustained a net loss of $548 million lastyear because of losses arising from Hurricane Ivan, an oil platformexplosion in the Mediterranean Sea and potential pollutionclaims.

Swiss Re announced it will not meet earnings estimates in theface of its projections that Hurricane Katrina losses will hit $1.2billion. As a result, the carrier will have to raise its prices,said CEO John Coomber. "We are witnessing increasing naturalcatastrophe events across the globe, affecting economies andsocieties with a higher frequency and severity. Price levels in theupcoming renewals must be adjusted to reflect these developments,"he said.

The company noted that due to the unique nature of theevent--the complexity and the magnitude of destructioncaused--accurate claims estimates remain difficult.

While the company's target of 10 percent earnings per sharegrowth will likely not be met for this year, Swiss Re said it doesexpect to use part of its equalization reserves, built to helpmitigate large claim events such as Katrina. Swiss Re said itsfinancial strength remains very strong and is expected to growfurther in the second half.

S&P said Katrina will not in all likelihood impair thesolvency of the Lloyd's insurance market even as it put Lloyd's onCredit Watch. Last week, Lloyd's announced a "provisional estimate"of the market's net loss from Katrina of ?1.4 billion--equalingabout $2.55 billion.

Lloyd's said the estimated Katrina loss is comparable with theimpact of 2004's four U.S windstorms, which resulted in a net lossto the market of ?1.3 billion ($2.37 billion).

Lloyd's stressed, however, that it "will not be possible, forsome time, to have a precise view of the ultimate insured lossbecause this is a complex catastrophe, the full extent of thedamage is unknown and the loss is still ongoing."

Lloyd's said there is nothing to suggest that any syndicatewould not be able to continue doing business as a direct result ofHurricane Katrina losses.

An S&P credit analyst, Matthew Day, said that while overall,Lloyd's solvency does not appear to be at risk, certain syndicatesare bound to feel the pain more than others, with those writing amaterial amount of energy risks, whole account or specific inwardexcess of loss, or a high percentage of U.S. dollar premium incomefacing the greatest financial peril.

In Monte Carlo, where he was attending the annual September"Rendez-Vous" of reinsurers, Julian James, Lloyd's director ofworldwide markets, said in reaction to the S&P announcementthat the analysts made it "very clear they don't see the solvencyof the market being impacted by this event." He noted that S&Psaid once the financial impact of Katrina is understood, it willreview the market's Credit Watch status.

Mr. James told National Underwriter that Lloyd's uses arealistic disaster scenario modeling process to assess catastrophesof this magnitude. "We modeled not only a $70 billion event hittingFlorida, but also the impact of a $60 billion event--not onlyhitting the Caribbean but also going through the Gulf of Mexico,creating extensive damage to offshore platforms and then makinglandfall," he said.

Although Lloyd's was surprised by the frequency rather than theseverity of the multiple storms that hit Florida last year, themarket has a "very complicated, sophisticated process of modelingseverity," he said.

He added that because all those doing business via the Lloyd'smarket think through and plan financially in the event of majorcatastrophes, their insurance programs are structured accordingly."So, I can't say that we've always got every event right--we didn'tanticipate an event like 9/11--but we continue to revise thosemodels. The fact that the businesses are capable of withstanding$60 billion events gives us huge comfort," Mr. James said.

He added that Lloyd's priority beyond assessing Katrina'sfinancial impact is responsibility to policyholders. For this, hesaid, Lloyd's has set up toll-free call centers in the U.S. tomatch policyholders with their retailers and wholesalers.

"From our standpoint, it's a hugely tragic event," he said."Because of the extent of human suffering, we're doing whatever wecan to make sure people understand how they can file claims in ourmarket, and that they're matched up with the right people."

Mr. James said Lloyd's customers in the areas hit by Katrinainclude a mixture of primary insurers and commercial policyholders,such as oil refining companies. "We've got a lot of cargo exposurethere, and there is cargo sitting in that port," he said, citingother affected clients, including a large sugar refinery as well assome residential policyholders.

(Additional reporting by Caroline McDonald inMonte Carlo.)

Distinguishing the portion of Hurricane Katrina damageattributable to wind or flooding will be difficult in many areas,and is likely to prompt numerous coverage disputes. See relatedstory on page 26.