S&P Puts 10 Insurers on “Katrina” CreditWatch/Negative

September 12, 2005

Standard & Poor’s Ratings Services announced that it has placed its ratings on 10 interactively rated insurance and reinsurance groups on CreditWatch with negative implications due to their possible “exposure to the catastrophic and unparalleled losses stemming from Hurricane Katrina.”

International companies on the list are: Ace Group, Lloyd’s, Oil Casualty, Montpelier Re, PXRE and Swiss Re. In each case all of the subsidiaries are also being reviewed, although many of them have no direct exposure to Katrina.

The U.S. companies are United Fire Group, Allmerica, Allstate, State Farm and their respective subsidiaries.

S&P noted: “The ratings on insurers with potential losses that were within expectations have not been placed on CreditWatch at this time.” S&P indicated its analysts had evaluated “personal lines, commercial lines, and reinsurance companies as well as bond insurers and mortgage insurers. Industry estimates for total insured losses are currently in an unusually wide and fast-evolving range–about $25 billion-$60 billion.”

“However, we remain skeptical about the reliability of any of these numbers,” noted S&P credit analyst Damien Magarelli. “At this point, we can only say with confidence that projected losses have increased sharply from initial estimates.”

S&P also indicated that, “assuming additional capital is not raised, as losses grow, greater quantities of ratings will be lowered, and the ones that are lowered will be lowered by more notches. Relative to the respective ratings, the companies placed on CreditWatch today have sufficient risk-management and risk-mitigation skills, capital, and liquidity to accommodate the losses they are likely to incur.

“However, an unusually high degree of uncertainty exists in assessing the magnitude of the claims the companies 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 are not yet able to fully assess the magnitude of their potential losses.

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

The rating agency said it had also considered its ratings on life insurance and health insurance lines, but had found that “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.”

“Today’s CreditWatch placements highlight the continued material uncertainty in accurately quantifying the insurance industry’s ultimate exposure,” added S&P credit analyst Steven Ader. “However, downgrades are not inevitable.”

S&P noted that it plans to meet with the management 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.”

S&P gave individual assessments for each of the companies involved. The reasons for the CreditWatch status on the international companies is as follows:
ACE – “earnings expectations might not be met based on the uncertainty and amount of Hurricane Katrina losses.”
Lloyd’s – “Placement reflects the uncertainty of the scale of the impact of Hurricane Katrina on Lloyd’s, the specializations of which include the insurance and reinsurance of offshore energy installations, property damage, and business interruption. Lloyd’s is still 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.”
Montpelier Re – Placement reflects “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.”
Oil Casualty – “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 – “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.
Swiss Re – “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 is consistent with the ‘AA’ ratings.” If downgraded, it will be by no more than “one notch.” (See also related article).

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