S&P Report Says Hurricane Losses Puts Pressure on Insurers’ Equity

February 18, 2005

The shareholders’ equity of many insurers and reinsurers is coming under greater pressure than anticipated as P/C losses from the 2004 hurricane season continue to rise with new estimates, according to a report by Standard & Poor’s Ratings Services.

The report, entitled, “Shareholders’ Equity Suffers As Insurers And
Reinsurers Restate Hurricane Losses,” cites two issues that continue to plague insurers, reinsurers and, ultimately, investors.

S&P indicated: “First, companies initially underestimated claims because of assumptions they made for construction costs and structural soundness of insured property, and obstacles they faced in gathering accurate information while the storms were still raging.

“Second, primary insurers were not adequately reinsured for the frequency of the storm season, which brought four hurricanes to the U.S. East Coast in August and September 2004 instead of just one.”

The rating agency said that in its opinion the increasing estimates affect, among others, American International Group Inc., Everest Re Group Ltd., IPC Holdings Ltd., RenaissanceRe Holdings Ltd. (RNR), St. Paul Travelers Cos., XL Capital Ltd., and Zurich.

The report cites a steep restatement by RNR, which revised its losses from hurricane-related claims in the third quarter of 2004 upward by 22.4 percent, to $520 million–equivalent to 21.2 percent of shareholders’ equity.

S&P said that it doesn’t plan “any ratings action singularly due to revised estimates with regard to the 2004 storm season.” The report explains that the rating agency had “already added a property catastrophe exposure-based charge into reinsurers’ capital adequacy and ratings expectations.” Credit analyst Damien Magarelli noted that “although Standard & Poor’s has not changed ratings or outlooks on these companies as a result, this does highlight a somewhat less conservative approach by these companies.”

The report is available to subscribers of RatingsDirect, Standard & Poor’s Web-based credit research and analysis system, at www.ratingsdirect.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-9823 or send an e-mail to: research_request@standardandpoors.com.

Ratings information can also be found on Standard & Poor’s public Web site at: www.standardandpoors.com. The research information is accessible for 24 hours after publication on the public Web site.

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