A.M. Best Issues Comment and Rating Implications of Sept. 11 Attacks

October 2, 2001

Since the morning of Sept. 11, A.M. Best Co. has been gathering public and private information in order to assess the financial impact as well as the nuances of insurance coverage associated with the tragic attacks.

To date, industrywide loss estimates are broad, ranging from $30 billion to $70 billion. Many specific estimates provided by companies directly affected by these events have been subject to significant upward revisions. A.M. Best believes this trend is likely to continue, given the discrepancies between gross estimates before reinsurance and net losses reported by specific companies in different segments of the industry. Although such disparity in loss estimates is typical in the days following the catastrophic events, the tragedy that occurred on Sept. 11 is unique and unprecedented in both its scope and complexity of potential losses.

Consequently, the direct and indirect effects of these events may not be fully understood for several years. We therefore reiterate comments made in our press release of Sept. 17, 2001, that the total insured loss is not yet determined, and it is still too early to predict the total financial impact of these events. However, it is A.M. Best’s expectation that losses will exceed $30 billion. A.M. Best also believes that the insurance industry as a whole will be able to meet its commitments.

The financial impact on each company with significant exposures relating to the events is being stress-tested by A.M. Best. The stress tests include: initial primary or initial reinsured loss versus capital requirements for the existing rating; the potential impact of losses significantly exceeding initial loss estimates relative to existing capitalization; losses arising from problems in collecting reinsurance or retrocession coverage; and the impact on capitalization and liquidity related to a significant reduction in the value of equity investments.

A.M. Best’s analysis of insurance company capitalization incorporates charges for catastrophic events, asset impairments and the uncollectability of reinsurance recoverables. The parameters used in the stress scenarios applied to insurers in connection with the Sept. 11 events significantly exceed our traditional parameters and are being viewed in relation to their existing capitalization and financial flexibility and in relation to A.M. Best’s expectations for their existing ratings. The stress scenario used by A.M. Best for the purpose of this analysis equates to more than twice the expected amounts reported to us and aggregates to industry losses of approximately $45 billion. Additional rating actions and revisions to those ratings included in this release are likely if the financial losses from the Sept. 11 tragedy are significantly greater than this amount.

This evaluation process, along with a comprehensive analysis of the existing reserve strength, earnings capacity and financial flexibility of those organizations affected by the Sept. 11 tragedy has resulted in ratings downgrades for certain insurers, the placement of ratings under review for several more and affirmations for a select number of others.

In addition to these rating actions, A.M. Best has affirmed the financial strength ratings and debt ratings of the leading global reinsurers and commercial lines providers who are expected to absorb a material portion of losses arising from the recent catastrophe and the major commercial insurers who are affected. Although A.M. Best acknowledges that losses for these organizations will be substantial and even potentially significantly exceed current estimates, we are confident the financial flexibility and resources maintained by these organizations remain more than adequate to provide for their obligations and support their ratings.

A.M. Best also believes that over the longer term, these organizations will continue to benefit from the “flight to quality” that was well under way in the reinsurance and commercial lines sectors before the events of Sept. 11. The complete list is available for review at www.insurance-portal.com/ambest.htm.

Additional rating actions will be forthcoming in the near-term for a number of other primary insurers and reinsurers with direct and indirect financial exposures to the recent terrorist events. A.M. Best will apply the following criteria for such actions:

Companies whose capitalization, reserve strength, earnings capacity, cash flow, liquidity and/or financial flexibility relative to their existing ratings will be insufficient to cover the immediate and near term financial impact of these events will be downgraded.

Companies who have significant exposures to these events, but may not have adequate capitalization, reserve strength, earnings capacity, cash flow, liquidity and/or financial flexibility relative to their existing ratings to cover the immediate and near term financial impact of these events will be placed under review with negative implications.

Companies who may have less significant exposures to these events and/or who might be affected either directly or indirectly over time will be placed under review with developing implications.

Companies who are significantly exposed to losses from the Sept. 11 tragedy but can demonstrate that they can maintain capitalization, reserve strength, earnings capacity, cash flow, liquidity and/or financial flexibility relative to their existing ratings to absorb losses from this event, as well as other exposures relating to their ongoing business activities, including catastrophic events, will be affirmed.

Although no significant rating actions have been taken on life insurers relating to recent events, A.M. Best will continue to review the potential implications for both direct writers and reinsurers in this segment. Loss estimates ranging from $2 billion to $6 billion for life insurers are well distributed among the largest and financially secure companies. However, differences between these gross loss estimates before reinsurance and reported net losses after reinsurance contribute to uncertainty for specific companies. A.M. Best will be reviewing additional exposures that might exist for life reinsurers for mortality benefits as well as additional exposure these companies might have to workers’ compensation claims. Traditionally, such “carve-out” coverages have been placed with life reinsurers.

A variety of additional financial implications indirectly related to the catastrophic events are likely to evolve over time. Consequently, A.M. Best will closely monitor the ongoing impact that depressed financial markets, weakened economic conditions, uncollectable reinsurance coverages, as well as the availability and pricing of reinsurance will have on companies’ capitalization, operating performance, liquidity, financial flexibility, risk profiles and competitive positioning in the industry. It is likely that these and other issues will impact A.M. Best’s ratings in the future and will be the subject of further review in our next phase of analysis of these tragic events.

In total, approximately 460 individual company ratings are affected by these actions. For more information, as well as a complete list, please please visit http://www.ambest.com/ratings/amblist.

Source: A.M. Best Co.

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