S&P Issues Report on Isabel and Insurance Rtgs

September 19, 2003

Hurricane Isabel probably will not have a material impact on primary property/casualty insurance or reinsurance company ratings, based an analysis of insurers’ preliminary loss projections, Standard & Poor’s Ratings Services said.

“Insurers are assuming that the hurricane will probably be within the $1.5 billion-$2.5 billion damage range, which is not enough to move most insurance company ratings,” said Standard & Poor’s credit analyst Steven Dreyer. “Despite suffering capital depletion in recent years from terrorism losses, asbestos claims, and natural catastrophes, property/casualty insurers and reinsurers are able to absorb this sort of loss without widespread rating downgrades or insolvency concerns. However, smaller, geographically concentrated insurance companies could be exposed to a disproportionate level of catastrophe exposure.”

A Standard & Poor’s catastrophe exposure estimate of insured direct losses in the states that could have the most significant damage shows that North Carolina could be exposed to between $1 billion and $2 billion in damages, and Virginia and the District of Columbia could be exposed to a few hundred million dollars combined. The lines making up 90% of the damage are homeowners multiple peril, auto physical damage, and commercial multiple peril (property).

At this time, Standard & Poor’s believes that the top-five companies exposed to the highest Isabel-related catastrophe losses in North Carolina on a direct basis (that is, prior to any reinsurance recoveries) are Nationwide Group, State Farm Mutual Group, Allstate Insurance Co. Group, North Carolina Farm Bureau Insurance Group, and Travelers Property Casualty Corp. and affiliates. “This is based on market share by catastrophe-exposed product line and expected loss severity in those lines,” said Standard & Poor’s credit analyst Alan Koerber. “Actual losses could vary, depending on the precise storm track and the geographic dispersion of policyholders at the company level.”

Comparable historical storms include Hurricane Floyd in 1999, with estimated insured property losses of $1.96 billion, and Hurricane Fran in 1996, which produced $1.6 billion in claims in 1996.

Estimating losses for individual insurers is not an exact science, as not all companies are comparable. “For example, a company might write a large amount of policies in noncoastal areas, in which case straight market-share comparisons could be inconsistent,” said Standard & Poor’s credit analyst Damien Magarelli. “Companies can have different deductibles, and retention amounts can differ.

“From a reinsurance standpoint, some companies could potentially have insignificant losses or no losses at all if a hurricane hits areas and primary companies that the reinsurance company does not cover,” Mr. Magarelli said.

At lower-category hurricane levels, the primary insurers will retain more of the losses and cede less. As a result, for reinsurance companies, Isabel might simply turn a light catastrophe year into a more normal year. Any reinsurance losses are expected to fall within budget estimates for most reinsurers.

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