Costliest Man-Made Disaster

September 14, 2001, CoStar Group News, Written by CoStar Staff,


Costliest Man-Made Disaster

Property Insurers Face Complexity of an Unprecedented Attack; Owners Face Increased Premiums

The terrorist attacks on the World Trade Center towers and resulting damage to lower Manhattan will be the most costly man-made catastrophe in U.S. history and will in all likelihood exceed the largest insured losses ever yet seen, say industry analysts.

Insured losses are likely to be in the billions of dollars, but it will be some time before the total impact can be made. However, the industry has the resources to handle the costs.

Click here for information and data regarding the World Trade Center Complex.

"The global property/casualty insurance and reinsurance industry today has the financial strength to handle the losses from the damage to property and life caused by the terrorist attacks," said Robert Hartwig, vice president and chief economist of the Insurance Information Institute. "Insurance coverage on large risks such as the World Trade Center and airlines traditionally are insured by a large number of insurance and reinsurance companies around the world. The major companies involved have great financial strength and integrity."

The Institute's assessment is echoed by independent analysis as well.

"Any attempt to quantify the financial impact of the recent terrorist actions in the U.S. must be purely speculative until more information becomes available, which may take weeks," said Steve Dreyer, managing director for U.S. Insurance Industry Ratings at Standard & Poor's. "But the insurance industry is strongly capitalized and can withstand an enormous financial hit without threat to the stability of the system overall."

"While we cannot yet endorse a specific estimate, companies so far have acknowledged about $4 billion in losses, a figure which will likely go much higher. Once insurable losses exceed $10 billion or $15 billion, we would expect to see a significant impact on balance sheets of individual insurers. However, the totals would have to exceed $50 billion before we would begin to worry about the insurance system," he said.

In comparison, Hurricane Andrew cost the industry approximately $20 billion in today's dollars.

"In terms of property damage, [the World Trade Center attack] is roughly equivalent to the impact of a major hurricane. It is a blow to property insurers, but it is something they are generally prepared to absorb so we are unlikely to see a rash of failures," commented Martin D. Weiss, chairman of Weiss Ratings. "In terms of emotional damage and loss of life, however, the impact is obviously much more severe than a hurricane or any other catastrophe we could have imagined."

Weiss noted that industry-wide, insurers collected $13 billion in premiums in 2000 for commercial multiple peril (non-liability) insurance with $1 billion in premiums written in the state of New York.

Property insurance policies generally cover damage from fire, explosion, smoke, or other property or liability loss that occurs. Insurance policies do exclude war, but this is generally defined as a declared war between nations. In light of increased global terrorism, some commercial insurance policies may have exclusions for damage caused by terrorist attacks. Aviation policies will also be impacted.

President George Bush declared Tuesday’s devastating attacks "acts of war" and asked Congress for emergency funding authority to do "whatever it takes" to help the victims and protect national security.

NATO has unanimously declared the hijack attacks on the U.S. to be an assault against all member states. Secretary-General George Robertson said the U.S. would receive support for military action from its 18 NATO partners if it is found the assaults were committed by foreign nationals.

Insurance companies, property owners and legal experts have an enormous task ahead sorting through this and other complex issues.

-- Even if primary insurers in the U.S. do not usually exclude terrorism from their covers, did the reinsurance protection obtained by affected U.S. insurers exclude terrorism, as is common practice among European reinsurers?

-- Will the crashes and subsequent building collapses be considered a single event or multiple events? This is an important consideration for the industry as definition of the losses either as a catastrophic single event or as a series of separate large claims will have a major bearing on which insurers and reinsurers eventually prove liable for the losses.

-- Will the events further exacerbate the already ongoing slide in equity asset values, both generally across all markets and specifically in respect of the share values of individual insurers and reinsurers? If so, how will this affect those individual insurers and reinsurers whose capitalization already appeared aggressive, and what will be the effect on those companies that were already well-advanced with new capital-raising exercises?

-- What impact will this tragedy have on reinsurance pricing? Reinsurance pricing could substantially firm in the wake of this catastrophe.

Long-term, Weiss, chairman of Weiss Ratings, said property owneer "will probably see an increase in premium rates and a decrease in coverage availability, especially for those properties that might be considered terrorist targets, but this will not cripple the property insurance industry."

Insurance companies reporting losses are as follows:

Kemper Insurance Cos.

The Kemper Insurance Cos. has established catastrophe teams to respond to all claims resulting from the terrorist attacks occurring nationally on Tuesday, in addition to mobilizing all available personnel to respond to the losses resulting from these catastrophic events.

"Our thoughts are with all of those affected by this catastrophic event," said William D. Smith, Kemper's president and COO. "We will continue to do everything we can to assist our employees, business partners and customers through this horrific tragedy."

The Kemper Insurance Cos. has established catastrophe teams to respond to all claims resulting from the terrorist attacks occurring nationally on Tuesday, in addition to mobilizing all available personnel to respond to the losses resulting from these catastrophic events.

"Our thoughts are with all of those affected by this catastrophic event," said William D. Smith, Kemper's president and COO. "We will continue to do everything we can to assist our employees, business partners and customers through this horrific tragedy."

Kemper Insurance Cos. is a leading provider of property/casualty insurance and risk management services with 2000 revenues totaling $4.8 billion and assets of $9.4 billion.

Chubb

Dean R. O'Hare, chairman and CEO of The Chubb Corp., said today, "The tragic terrorist attacks on the World Trade Center and elsewhere in the United States are almost beyond comprehension. We extend our deepest sympathy to the families of those who suffered deaths and injuries in today's attacks."

"It is difficult to focus on the financial fallout of these events during this time of overwhelming human tragedy and grief," O'Hare said. Although it is too early to estimate accurately the financial impact of these tragedies on Chubb, based on preliminary reports and estimates the company believes it has significant property exposure in the World Trade Center, both for the structure and for businesses housed in the towers."

"However, significant reinsurance that is in place is expected to limit Chubb's pre-tax loss to the range of $100 million to $200 million, subject to revision as more facts become known," O'Hare said. "In addition, the company will also pay customers' claims under business interruption, accident and workers' compensation coverages, but it is unable at this time to quantify the potential exposure for these losses."

Swiss Re

Swiss Re did not provide a dollar estimate of its potential losses, but did say this event is expected to be in the range of the 1999 European winter storms.

"Swiss Re is deeply moved by yesterday's tragic events in the United States," the company said in a prepared release. "Our very first concern is for the victims and their families affected by this tragedy. Swiss Re people have long-standing and often personal relationships with the financial and insurance community across the United States and particularly in New York. Our thoughts and deepest sympathies are with them at this time. Swiss Re has long known that no financial payment can make up for any human suffering."

"Swiss Re has many times in its history been faced with the consequences of large catastrophes. Even though this is one of the largest loss events possible, Swiss Re's financial strength is not in doubt and the fundamentals of the company will not change. It is the essence of our business to manage such large losses for our clients and Swiss Re carries provisions for large catastrophic events of this magnitude."

The Hartford Financial Services Group

The Hartford Financial Services Group announced that it has a catastrophe team in place at its Shelton, CT, claim center, ready to move closer to New York when possible.

"We are deeply saddened by [these] horrific events. Our heartfelt condolences go out to all of the people who have been affected by this terrible tragedy," said David Zwiener, president of The Hartford's property-casualty operations. "We will do everything we can to help our customers during this very difficult time."

The Hartford is one of the nation's largest insurance and financial services companies, with 2000 revenues of $14.7 billion.

ACE Limited

The ACE Limited, one of the world’s leading providers of insurance and reinsurance, opened all U.S offices with the exception of space occupied in the vicinity of the World Trade Center on Thursday.

Brian Duperreault, chairman and chief executive officer of ACE Limited said, "We are assessing the impact on ACE, as we must, and we are in an excellent position to weather this catastrophe. At the same time, the safety, security and well-being of our employees are uppermost in our minds. We are also reaching out in whatever way we can to assist those business partners, families and friends whose lives have been changed forever."

Mr. Duperreault said that an event of such unprecedented magnitude would have a significant negative impact on the Company's third quarter results. "As a result of these events, we estimate that third quarter net operating income, after tax, will be reduced by approximately $400 million."

American International Group, Inc. (AIG)

AIG the leading U.S.-based international insurance and financial services organization and the largest underwriter of commercial and industrial insurance in the United State issued a preliminary estimate of its total expected losses resulting from Tuesday's terrorist attacks. Based on information available at this time, AIG's net pretax losses are expected to approximate $500 million.

AIG Chairman M. R. Greenberg said, "We remain intensely focused on providing immediate assistance and relief to those who have suffered losses relating to this enormous national tragedy. Our crisis teams are in place, functioning on a twenty-four hour basis, and they are prepared to process claims.

"It is impossible for any company to precisely estimate total losses at this time. Although AIG's property insurance coverages on the World Trade Center complex are minor, as the world's largest commercial insurer, we expect to receive claims from many insureds across a wide range of coverages. These losses will not impact the solid financial condition of AIG, the strongest insurance and financial services company in world."

Ambac Financial Group, Inc.

Ambac Financial Group says that it does not expect any material claims as a result of the World Trade Center tragedy. However it is facing exposure from insured transactions, including bonds. In the event that any Ambac-insured transaction defaults in the payment of principal or interest, Ambac will make payments in accordance with the relevant policy.

The group has approximately $160 million in net par exposure to the World Financial Center through exposure to the Battery Park City Authority, which is secured by payments in lieu of real estate taxes that are payable over the term of the transaction. Ambac has $40 million in net par exposure to the New York City Educational Construction Fund. These bonds financed construction of a school located just north of Battery Park City and are ultimately secured by lease payments from New York City. Additionally, Ambac has approximately $157 million in net par exposure to the Port Authority of New York and New Jersey Consolidated Revenue Bonds. The general revenues of the Port Authority, including revenues from bridges, tunnels, ports and airports, back these bonds.

Ambac Financial Group, Inc., headquartered in New York City, is a holding company whose affiliates provide financial guarantees and financial services to clients in both the public and private sectors around the world. Ambac's principal operating subsidiary, Ambac Assurance Corp., a leading guarantor of municipal and structured finance obligations.

Financial Security Assurance (FSA)

FSA a Triple-A bond insurer, which guarantees scheduled payments of principal and interest of municipal bonds, infrastructure financings and asset-back securities worldwide does not expect that it will incur any losses as a result of the tragedy. Its exposure includes approximately $131 million of gross exposure, which is reduced to approximately $76 million after reinsurance, to Port Authority of New York and New Jersey Consolidated Revenue Bonds back by the Authority's general revenues, including those from bridges and tunnels, and not directly secured by lease payments or other payments related to the World Trade Center.

HCC Insurance Holdings

HCC reported that it has a small participation in the World Trade Center property insurance coverage and some of the surrounding buildings. It anticipates some claims from its Medical Stop-Loss business in the New York City area and some exposure from Accident & Health and Workers Compensation reinsurance account.

Though HCC could not provided specific estimates it anticipates that the resulting net loss will be confined to an amount less than HCC's third quarter earnings. Using the 3rd quarter consensus earnings per share estimate of 38 cents per share the loss will be roughly less than $22 million. HCC is one of the largest specialty insurance groups in the United States and consists of insurance company, underwriting agency and intermediary operations.

XL Capital Ltd

Based on initial loss reports and estimates, XL preliminarily anticipates having claims of approximately $600 million to $700 million, net of reinsurance recoveries, stemming from the attacks on the World Trade Center and related events. Claims are expected to arise mainly from the company's aviation, property and business interruption insurance and reinsurance coverages.

Brian M. O'Hara, President and Chief Executive Officer of XL Capital Ltd, stated, "As both an insurer and reinsurer, XL has always specialized in providing its customers with protection from large catastrophic events. We are in the business of bearing such risks and stand ready to meet all of our obligations, especially in the context of one of the worst disasters in U.S. history. Our customers should rest assured that XL has ample balance sheet strength and liquidity to pay claims on a timely basis." The firm decided not to proceed with a private placement of securities on Friday in view of the dislocation of the financial markets caused by the World Trade Center attack.

XL Capital Ltd, through its operating subsidiaries, is a leading provider of insurance and reinsurance coverages and financial products to industrial, commercial and professional service firms, insurance companies and other enterprises on a worldwide basis. As at June 30, 2001, XL had consolidated assets of approximately $18.7 billion and consolidated shareholders' equity of approximately $5.7 billion.

Mark Heschmeyer and Iolaire McFadden contributed to this story.