A.M. Best Comments on the Impact of Hurricane Katrina on the Global Reinsurance Industry

Business Wire, Sept 9, 2005

OLDWICK, N.J. -- Although global European reinsurers such as Munich Re, Swiss Re and Hannover Re have already provided estimates for their potential exposure to Hurricane Katrina, A.M. Best Co. believes that it may take longer to fully assess the extent of damage in the Gulf of Mexico region and that it could be significantly higher than initially anticipated (with overall insured damage estimates currently ranging from USD 20 billion to USD 60 billion).

Munich Re's initial claims estimate is approximately EUR 400 million (USD 490 million), while Swiss Re's and Hannover Re's initial estimates are approximately USD 500 million and EUR 250 million (USD 310 million), respectively. While Munich Re and Swiss Re are sticking to their earnings forecast of earlier this year, Hannover Re has admitted that Hurricane Katrina is negatively impacting profits and has subsequently revised its earnings forecast to closer to last year's figure.

A.M. Best believes that earnings for reinsurers with large natural catastrophe exposure could come under pressure in 2005, not only from higher than anticipated claims relating to Katrina, but also from new claims arising from the still ongoing hurricane season, with some natural catastrophe experts estimating that up to 10 further Atlantic hurricanes may occur this year. Also, reinsurers have already been hit by a number of other natural catastrophes this year, such as storm Erwin in Europe in January, floods in Austria, Switzerland and Germany in August, typhoons in Japan, and flooding in the South of France, although this has been partially covered by the French state-owned reinsurer, CCR.

It is generally accepted that the frequency of natural catastrophes has accelerated in the last decade. In the last few years, reinsurers have encountered a number of events that were predicted to occur only once in a hundred years, such as the storms Lothar and Martin in 1999, the floods in Germany in 2002 and last year's hurricanes in the United States. A.M. Best believes that potentially higher volatility of underwriting results could make it increasingly difficult for reinsurers to forecast earnings, potentially alarming shareholders and investors, thus negatively impacting reinsurers' financial flexibility.

In the short term, A.M. Best believes that the financial impact of Hurricane Katrina could positively influence the forthcoming renewal season as reinsurers remain more inclined to stick to pricing targets. In A.M. Best's view, there was a clear downward trend in the underwriting cycle. However, the accumulation of floods, hurricanes and typhoons may alleviate the anticipated pressure on premium rates, especially in property where ample capacity has been available.

A.M. Best expects that the ratings of reinsurers with a significant exposure to Hurricane Katrina could be downgraded. A.M. Best generally expects rated property/casualty companies to maintain risk-adjusted capitalisation supporting an existing rating, even after a 1/250 years earthquake or 1/100 years windstorm event. However, for reinsurers with limited exposure to Katrina, pressure could arise from an accumulation of adverse developments, such as further significant claims from natural catastrophes or necessary reserve strengthening, resulting in a deterioration of reinsurers' risk-adjusted capitalisation.

Prospectively, A.M. Best believes that the stability of ratings will largely depend on a reinsurer's ability to effectively manage its exposure to more frequent natural catastrophe risks. In addition, reinsurers will be expected to generate sufficient earnings to absorb potential adverse loss developments from previous--as well as current--underwriting years while continuing to build their risk-adjusted capitalisation to withstand any potential sharp falls in the underwriting cycle.

For Best's Ratings, an overview of the rating process and rating methodologies, please visit www.ambest.com/ratings.> A.M. Best Co., established in 1899, is the world's oldest and most authoritative insurance rating and information source. For more information, visit A.M. Best's Web site at www.ambest.com.