Best Reacts on Potential Exposure to Rita

September 23, 2005

In advance of Hurricane Rita, A.M. Best Co. has begun to assess the potential financial impact an event of this magnitude may have on the property/casualty and reinsurance industry.

While the exact point of landfall remains uncertain, the current projected size and intensity of the storm could result in sizeable insured losses. As the Hurricane is projected to make landfall within four weeks of the devastating effects of Hurricane Katrina, the overall financial impact to the industry will likely be magnified.

A.M. Best’s initial focus will be on those organizations viewed as a priority as a result of various market share reviews. While this approach is somewhat limited, particularly given the geographic spread associated with Texas and the impact of reinsurance, it provides an initial framework for determining which companies should receive the highest priority within our review.

However, the inclusion of any company in this announcement does not indicate anything about the company’s A.M. Best Rating. It merely indicates that there is a need to look closer at the company’s exposure to potential losses from Rita.

In addition, A.M. Best will focus on those companies that have exposure to the Texas market that also sustained significant losses associated with Hurricane Katrina, particularly as it relates to the reinsurance segment as well as national primary insurers.

Although there is no systematic calculation that can be used to determine individual reinsurer’s exposure to losses from Hurricane Rita, due to the anticipated large percentage of losses that will be absorbed by catastrophe reinsurance, A.M. Best includes all reinsurers on its priority list for review.

For primary insurers, A.M. Best has created a combined market share for those lines most likely to be affected by losses from Hurricane Rita. The distribution of losses between lines of business used by A.M. Best is Homeowners – 55%, Commercial Multiple Peril – Non-liability – 30%, Automobile Physical Damage – 10% and Farmowners – 5%.

Based on this distribution and A.M. Best by line Market Share Reports, those companies with the largest combined market share are:

Company Share **
State Farm Group * 21.0%
Allstate Insurance Group 10.9
Farmers Insurance Group 9.0
St. Paul Travelers Companies 7.7
USAA Group 4.4
Chubb Group of Insurance Companies 4.3
Nationwide Group 3.5
Zurich Financial Services NA Group 3.3
Southern Farm Bureau Group 3.0
Hartford Insurance Group 3.0

[*Market share is based upon direct premiums written.]
[** A majority of State Farm’s potential loss is in its separately capitalized and rated Texas company, State Farm Lloyds].

A.M. Best’s initial focus will also include those companies with high potential market share losses relative to their policyholder surplus. A.M. Best utilizes its market share information to review the impact of a broad spectrum of potential storm losses on individual companies relative to their policyholder surplus.

Listed below are those companies that could have a high potential market share loss relative to surplus, depending on the size of losses from Rita. Those that are currently rated by A.M. Best will be given a priority review based on this measurement.

· All Reinsurers
· American Strategic Insurance Group
· Apex Lloyds Insurance Company
· Beacon Insurance Group
· Church Mutual Insurance Company
· Colonial Insurance Group
· Columbia Insurance Group
· Commercial Alliance Insurance Company
· Cypress Holdings Group
· Delta Lloyds Insurance Company of Houston
· Home State Insurance Group
· NLASCO Group
· Old American County Mutual Fire
· Republic Companies Group
· Southland Lloyds Insurance Company
· State Farm Lloyds
· Titus Group
· Triangle Insurance Company
· US Lloyds Insurance Company
· Vesta Insurance Group
· Wellington Insurance Company.

While there may be exposure to hurricane losses, none of the ratings on these companies should be considered at risk at this time until a review of all related issues is completed by A.M. Best.

The most important part of that review will be a company’s catastrophe reinsurance protection, which is not considered in a market share analysis. Additionally, A.M. Best’s review will include each company’s geographic mix of business as well as overall risk management capabilities.

Finally, the coverage a company provides must also be considered as many companies either do not provide coverage of wind related losses, particularly along the coast, or include large deductibles to help minimize the amount of loss covered and premium charged.

While the Texas Windstorm Insurance Association (TWIA) will cover a portion of losses along the Texas coast, it appears to be prepared to fund up to $1 billion in losses at this time. This coverage comes from a $300 million catastrophe reserve fund along with $700 million of reinsurance coverage. Depending on the size of the loss for TWIA, insurers may face assessments that could impact future operating earnings and capitalization.

Lastly, given the significant volume of claims from Katrina and the potential losses associated with Hurricane Rita, a number of companies’ claims operations may be stressed, leading to greater risk of errors, bad faith claims and undetected fraud.

A.M. Best will continue to evaluate the potential and actual impact of Hurricane Rita as it progresses and as more detailed information becomes available. While it is preliminary and company estimates of losses after the event will certainly take time to accumulate, A.M. Best expects all rated companies will provide some basis for their potential loss within a reasonable time frame.

Given the significant losses associated with Hurricane Katrina and the current projected magnitude of Rita, the possibility exists for rating actions associated with this unprecedented catastrophic activity.

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