Fitch Notes Potential Unreported Losses from Sept. 11

October 9, 2001

Based on preliminary results of its survey of insurance and reinsurance company’s gross and net loss exposures from the events on Sept. 11, Fitch stated it believes that there could be potentially large unreported losses between the primary insurance and reinsurance markets.

According to the rating agency, a majority of such unreported losses will relate to asymmetrical accounting techniques used for finite risk reinsurance contracts, as well as draw downs on equalization reserves by European reinsurers. Such unreported losses could exceed $3-6 billion, per Fitch’s preliminary estimates. To put this in perspective, total aggregate industry pretax loss estimates continue to range between $30 and $70 billion. To date, Fitch has been able to identify nearly $21 billion in total loss estimates reported by nearly 90 individual insurers and reinsurers.

Fitch has indicated it is important for industry observers to recognize the impact of finite reinsurance contracts from two critical perspectives when analyzing insurance industry losses from the Sept. 11 events:

— It is likely that a large cross section of primary insurers (and reinsurers who purchase finite retrocession covers) will be taking credit for ceded balances that they will ultimately pay themselves. Thus a number of primary insurers’ net losses recorded in 2001 will understate the true economic impact of the events, since future expenses for reimbursements to reinsurers will be unaccounted for in a future period and create a drag on future earnings.

— It is likely that ceded balances reported by primary insurers will exceed assumed losses reported by reinsurers, both in the aggregate and for certain companies. The existence of finite covers will make it that much more difficult to judge how much of this gap is due to finite covers, and how much is due to a true misstatement of loss estimates.

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