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13 on Credit Watch

Posted on 05 Oct 05

Thomas Upton, senior credit analyst with Standard & Poor's, reported that 13 insurance companies were placed on Credit Watch by the rating service. The move was made because it is felt they would be unable to absorb the losses during this year's hurricane season without recapitalization, he said. He further predicted that the thirteen insurers will have to go to the investment market to seek capital to cover their losses from Hurricane Katrina.

The rating service contacted 80 domestic and global companies about their ability to absorb the losses. All but the 13 are able to absorb the losses with their 2005 earnings. Those companies on Credit Watch are expected to resolve the financing within 90 days, he noted, adding that the rating outlook is considered "short-term."

As a sign of how quickly the issue is expected to be resolved, he noted that one company on Credit Watch, Montpelier Re, will be removed because it has secured $600 million in new equity through the markets recently. S&P also placed Transatlantic Reinsurance Company and IPCRe Ltd. on Credit Watch.

Mr. Upton said that S&P has released a report changing the outlook on the global reinsurance industry, as a group, from negative to stable. Some would see downgrades, but he added that they would be "few in number." "The impact on the insurance industry from [Hurricanes] Katrina and Rita is unprecedented," Mr. Upton remarked, noting that losses are expected to be three times those of Hurricane Andrew and twice those of 9-11.
Catastrophe modelers have said insured losses from Katrina could top $60 billion and the high estimate for Rita is around $7 billion.

The fact that insurers are relying on modelers for their estimate of losses is one of the significant issues surrounding the industry, he went on to say. Because of flooding and delays caused by Rita for adjusters to get into some areas, insurers have not gotten solid numbers to work with. Overall, he said there would be few ratings downgrades from these events, but he made that assessment with a few caveats.

A hard market must follow, whether it is regional in nature or extends generally, because capital must be replaced, Mr. Upton noted. He said a hard market draws in capital, and without that influx the industry could be hurt. Some lines may see long-tail effects from the storm, he suggested, such as environmental damage, where claims could be dragged out for years.

Mr. Upton expressed concern that political pressures could also affect the industry. He said there will be those who feel the industry should go beyond the limits of its contracts to help its policyholders, noting the suit in Mississippi by Attorney General Jim Hood to force home insurers to cover normally excluded flood damage. On this point, more companies may feel the need to set up separate companies within a state to shield the greater company from losses endemic to that region, but the move could be opposed by regulators.