Downgrades Loom As Katrina Loss Grows

With insured damages as high as $60 billion, rating agencies raise concerns

By Daniel Hays and Caroline McDonald

With modeling firms continuing to hike insured loss estimates for Hurricane Katrina to as high as $60 billion, rating agencies put personal lines giants Allstate and State Farm, along with other key insurers and reinsurers, on notice for a possible storm-related downgrade.

Risk Management Solutions announced that Katrina could cost insurers anywhere from $40-to-$60 billion--of which $15-to-$25 billion is related to the flooding in New Orleans. "The final insured loss from Hurricane Katrina will depend on how flood claims are apportioned among the National Flood Insurance Program, private insurers and individuals," according to the Newark, Calif.-based RMS.

"Insurers can also expect deterioration losses in houses that are abandoned for a long period of time, and losses from fires and looting [in flooded New Orleans], where it could take months to drain the water and fully assess the level of structural damage, as well as the contamination in the soil and ground water," RMS added.

"This is the first urban flood that has affected such a vast and industrialized region. Without benchmarks, authorities have little experience to inform them of the levels of contamination to expect once the waters recede, or how long it will take before the region can be inhabited again," said an RMS vice president, Laurie Johnson.

Meanwhile, Fitch Ratings--in addition to Allstate and State Farm--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., Oil Casualty Insurance Ltd., Swiss Re and United Fire & Casualty Co.

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

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

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

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

Moody's said it placed the rating of PXRE Capital Trust under review because of the company's announcement of its net loss from Hurricane Katrina at about $235 million. Moody's noted PXRE's statement that it expects to report a net loss of $85-to-$100 million for 2005, assuming no additional material catastrophes this year.

Moody's said its review will consider the degree of uncertainty surrounding current loss estimates given the unusual characteristics of Katrina, as well as the prospect for various disputes--including the extent to which retrocessional coverage will respond. Moody's said Montpelier Re Ltd. and Montpelier Re Holdings Ltd. were put under review after the company estimated Katrina impact in the range of $450-to-$675 million.

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

Oil Casualty's maximum exposure to Katrina losses is capped at $1 billion due to the company's aggregate limit for losses arising from one event, noted Moody's. However, the rating agency said such losses will further weaken Oil Casualty's $1.8 billion capitalization, which sustained a net loss of $548 million last year because of losses arising from Hurricane Ivan, an oil platform explosion in the Mediterranean Sea and potential pollution claims.

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

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

While the company's target of 10 percent earnings per share growth will likely not be met for this year, Swiss Re said it does expect to use part of its equalization reserves, built to help mitigate large claim events such as Katrina. Swiss Re said its financial strength remains very strong and is expected to grow further in the second half.

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

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

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

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

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

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

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

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

He added that because all those doing business via the Lloyd's market think through and plan financially in the event of major catastrophes, their insurance programs are structured accordingly. "So, I can't say that we've always got every event right--we didn't anticipate an event like 9/11--but we continue to revise those models. 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's financial impact is responsibility to policyholders. For this, he said, Lloyd's has set up toll-free call centers in the U.S. to match 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 we can to make sure people understand how they can file claims in our market, and that they're matched up with the right people."

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

(Additional reporting by Caroline McDonald in Monte Carlo.)

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

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As Hurricane Katrina Losses Grow, Rating Agency Downgrades Loom

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