Hurricane Loss Update

The current outlook on the global reinsurance market is divided between stable and negative with Standard & Poor’s Ratings Services referencing a negative rating and, after reviewing the effect of Hurricane’s Katrina and Rita, Fitch Ratings indicating a stable outlook.

Standard & Poor’s believes that concerns of the moderately negative financial strength of the global reinsurance industry are mainly related to: the operating performance of the industry in 2005 and the flexibility of those wishing to raise new capital; the availability and affordability of retrocession cover for similar catastrophes; and, the growing frequency of large loss events and the difficulties inherent in modeling and pricing such risks adequately.

“The negative outlook reflects the near-term strains on financial strength arising from the impact reported by reinsurers of the most expensive loss event in the industry’s history, Hurricane Katrina,” Standard & Poor’s says. “Furthermore, the impact of Hurricane Rita, although likely to be limited compared with Katrina, compounds Standard & Poor’s concerns.”

Standard & Poor’s conclusion reflects an expectation that downgrades will outnumber upgrades in the remainder of 2005. However they maintain that the number of downgrades will likely be modest.

Unlike Standard & Poor’s recent downgrade from stable to negative, Fitch maintains it’s stable outlook under the premise that the losses from Hurricanes Katrina and Rita will be manageable in relation to the sector’s overall capital base.

Underlying this forecast is the fact that there will be a $30-50 billion industry-wide insured Katrina loss and a $3-6 billion industry-wide insured Rita loss. Additionally, Fitch ascertains that the insurers with the largest market shares in the affected states, State Farm and Allstate, will incur, and retain, $10 to 16 billion of the industry-wide insured loss. Furthermore, Fitch’s analysis assumes that two-thirds of the industry-wide losses, or $15 to 26 billion, will be absorbed by the reinsurance sector.

As a result of the global reinsurance sector’s year-end 2004 results of approximately $350 billion of equity or surplus, Fitch believes that the sector’s pre-tax losses from Hurricanes Katrina and Rita will represent a comparatively modest four to 8% of the sector’s beginning of the 2005 year equity or surplus.

Fitch believes that it is reasonable to assume that the reinsurance sector will be able to recoup its $15-26 billion in 2005 hurricane losses in a 12- to 18-month period.

The stable outlook referenced by Fitch is only anticipated to be retained as long as no further shock losses occur.