Fitch Assesses Insurer/Reinsurer Loss Exposures to U.S. Attacks

September 19, 2001

Fitch announced that, while it is too soon to draw solid conclusions, it believes that a vast majority of the insurers and reinsurers it rates will be able to absorb any losses without material damage to their financial positions.

This is due to the generally very high levels of financial strength and credit quality maintained throughout the insurance and reinsurance industries. Further, to the extent there are insolvencies, Fitch believes these would be limited to smaller insurers or reinsurers that are faced with undue risk concentrations. The agency does not believe insolvencies are imminent, but given the likely magnitude of losses, they can not yet be ruled out.

Fitch has said that over the next several days it will be in discussions with the property/casualty and life/health insurers and reinsurers within its ratings universe to begin determining if losses from the terrorist attacks on the World Trade Center and Pentagon will have a material effect on their ability to pay claims or meet debt service obligations. The review will include primary insurers in the United States, and reinsurance companies worldwide that assume U.S. exposures.

Based on various preliminary reports, Fitch believes that the insured losses from these events could ultimately prove to be the largest in history. Early estimates peg property/casualty-related losses as high as $20 billion – $30 billion, which, in and of themselves, would exceed the $16 billion of losses from Hurricane Andrew in 1992, which, to date, is the largest insured loss from a single event. Further, there will likely be several billion dollars worth of claims to life/health insurers on life insurance policies and accident and health policies.

Fitch is not yet providing its own prediction of ultimate losses and emphasizes that any loss estimates at this time are preliminary and subject to change. Several major factors can influence final losses. These include: the period of time that any business interruptions continue, the number of casualties, the extent of use of policy language exclusions for terrorist attacks, the ultimate definition of the number of events that occurred (which can significantly affect the ultimate split of losses between primary insurers and reinsurers), and ultimately whether the events are considered “acts of war” as defined under policy exclusions.

The agency believes that insured losses will come from various lines of insurance, including property, aviation, business interruption, workers compensation, commercial liability and auto coverages for property/casualty companies, and both group and individual life and health policies for life insurers.

Since most primary insurance companies purchase reinsurance to protect against large loss exposures, Fitch believes that reinsurers will likely need to absorb a significant portion of total insured losses. It further believes that aviation-related losses will likely be concentrated in the London market. Losses suffered by life insurers may be most felt by those with group concentrations, and those catering for higher net worth individuals.

As Fitch completes its discussions and analyses, it will make any appropriate announcements as to ratings actions or Rating Watch changes on a company by company basis.

Prior to these events, Fitch had announced on Aug. 2, 2001, that it was undertaking a broad review of all of its ratings of commercial property/casualty insurers in the U.S. tied to concerns as to reserve adequacy. Fitch is nearing the end of its analyses tied to that review and will consider the results of both its reserving review and this most recent review together in reaching its final ratings conclusions for any given insurer or reinsurer.

In addition to reviewing potential losses on insurance coverages, Fitch will also review insurance companies’ investment portfolios and the effect of any market disruptions on carrying values and portfolio liquidity. The agency believes that expected heightened levels of volatility in the capital markets will create added challenges for insurers in maintaining stability in their balance sheets. However, Fitch is cautiously optimistic that investment-related volatility may prove to be temporary, and will not have a material long-term negative effect on most companies in its ratings universe.

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