S&P Report: Reinsurers Solid After WTC Attack

October 3, 2001

The four major engines of global reinsurance–Swiss Re, General & Cologne Re, Munich Re, and Employers

Re–form the backbone of a financially sound insurance response to the World Trade Center attack of Sept. 11, according to a new report published by Standard & Poor’s.

The report takes issue with the gloomy forecasts of some analysts, who call into question the claims-playing ability of the secondary insurance market. Rather, the report contends, the terrorist act will increase demand for insurance products in general and boost pricing, and these forces will in time enable reinsurers to replenish the capital they lost in 2001.

“Reinsurers will not only provide the critical financial backing for payouts
resulting from the tragedy, but rebuild a fortified position with strong earnings
in coming years,” said Don Watson, author of the report.

Among the 180 or so reinsurance players rated by S&P, most are in the secure range (“BBB” or higher). Among the top 25, which accounted for almost 60 percent of premiums in 2000, only nine have been placed on CreditWatch since the attack (indicating they are under increased short-term surveillance for possible rating actions). Among the rest, 10 retain “AAA” ratings. Even if downgrades occur, S&P does not expect any company to lose its secure-range status.

The big four “AAA” rated reinsurance groups “are looking especially robust,” Watson said. These generated almost half of global premiums in 2000 and are collectively pitching loss estimates in excess of $5 billion.

S&P factored into its reinsurance outlook a significant upward revision to the loss estimates it has so far received, reflecting the rapidity of upward adjustments by some companies and the wide range of forecasts in general. There remains a large discrepancy between estimates for the insurance industry as a whole, which in some cases exceed $70 billion for property/casualty payouts, and the sum of loss exposures reported by individual companies, which amounted to about $20 billion as of Oct. 1, 2001.

The latter will continue climbing in the next few weeks or even months (although,
at this point, the largest total estimates are hard to support), but S&P has
deferred the establishment of a total industry-loss figure until insurers are able
to complete their assessments on the basis of claims received.

Anticipated losses were also set in the context of a company’s earnings potential and consequent ability to replenish capital through year-end 2002, bearing in mind there will be sharp hikes in premium rates with 2002 renewals.

The report, “Reinsurance Powerhouses Will Uphold U.S. Insurers in World Trade Center Payouts,” is available on RatingsDirect and on www.standardandpoors.com/Forum/RatingsCommentaries/Insurance/

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