The two financial watchdogs--Standard & Poor's and Moody's--assessed the state of the market here in Monte Carlo during the annual reinsurance "Rendez-vous."

In its assessment, S&P said Katrina losses are more unusual than those of Sept. 11, 2001 and will certainly be greater, but despite an overall softening commercial market, its reinsurance outlook remains stable.

After 9/11, "we were hearing sooner from companies what their estimated losses were," Laline Carvalho, director with S&P in New York, said at a press conference here. She noted that complications of flooding from the levees breaking in New Orleans will create more gray areas when interpreting claims.

In theory, she said, homeowners policies do not cover flood damage, but insurers may be "under political pressure" to cover such losses regardless of the cause.

S&P's stable view, the report said, is based on good prospects for continued strong medium-term non-life underwriting performance, as well as an expectation that the next cyclical low in the market will be less severe than it's been historically, leading to a flattening of such swings.

Katrina's impact on ratings is expected to be confined to a "handful of reinsurers," the report found--an assessment based on a marketwide Katrina loss of up to $50 billion and on information supplied to S&P by various insurers companies.

Ms. Carvalho said that losses greater than $50 billion could mean that more companies will have a loss of surplus and may be seeking to raise capital. Losses of this magnitude would trigger a reassessment of reinsurer ratings, the agency said.

Also being tested with Hurricane Katrina is the effectiveness of company catastrophe models, according to Rob Jones, S&P's managing director in London. "In six months we'll know how effective the models are," he said.

Mr. Jones said that most primary insurers are projecting losses for Katrina based on models. "Nobody is working with real data at this point," he said. "People are still trying to understand the magnitude of this event." Hurricane Katrina is a "unique set of circumstances" and is "not modelable from the past," he added.

The S&P report--"Global Reinsurance: Outlook Stable Despite Market Softening And Hurricane Katrina"--found that the global non-life reinsurance industry is entering a "critical phase" in its development as it faces the key issue of whether the severity of the downturn of previous cycles can be avoided. S&P believes the cycle is "here to stay" but that there is pressure on senior management of reinsurers to maintain discipline.

The report found that encouraging factors within the current environment include an increased use of sophisticated pricing tools, which will ensure that financial targets are reflected in pricing decisions, along with greater transparency.

Moody's Investors Service said it has maintained its stable rating outlook on the reinsurance industry, based on a favorable pricing environment and strong profits in recent years--particularly in property business. Still, the rating agency expressed concerns.

Moody's mentioned persistent reserve weakness on U.S. casualty business written during the soft market years of 1997-2001, as well as catastrophe exposures.

In addition, Moody's said the reinsurance industry faces pressure to maintain its underwriting discipline during the softening market, and faces uncertainty due to ongoing regulatory investigations and possible termination or reduction in U.S. government terrorism coverage.

Moody's explains its outlook and provides comparative financial information on leading reinsurers in its "Global Reinsurance Industry Outlook," dated September 2005.

"The reinsurance outlook was raised to stable from negative in September 2004, following a period of numerous downgrades in 2001-2003," said Timour Boudkeev, a Moody's insurance analyst and author of the report. Since then, the number of downgrades has been small, driven by company-specific circumstances rather than industrywide forces, he noted.

"Ratings have stabilized at a perceptibly lower level--today, double-A and single-A ratings are the norm for the better-positioned firms," added Mr.Boudkeev.

The rating agency observed that the reinsurance industry continues to show good diversification across business segments, geographies and products, as well as increasingly sophisticated capital and risk management policies.

Moody's noted a strong pricing environment, which over the past few years has enabled reinsurers to bring their capitalization back in line with their current ratings through retained earnings.

"High earnings in recent years have enabled many players to quietly strengthen their balance sheets by increasing reserves for the most problematic exposures, such as U.S. casualty lines and, to a lesser degree, asbestos and environmental," said Mr. Boudkeev. An absence of major catastrophe losses until Hurricane Katrina hit also enabled reinsurers to strengthen balance sheets, Moody's said.

While reinsurers readily handled extensive hurricane losses of 2004, Hurricane Katrina may become the costliest natural disaster loss in history, in terms of economic and insured damages, Moody's said, impacting carriers all the way up the chain, penetrating many reinsurance layers.

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"Nobody is working with real data at this point. People are still trying to understand the magnitude of this event," warns S&P.

Flag: Recap

Head: Moody's Warning Signs

Moody's September "Global Reinsurance Industry Outlook" also highlights concerns about the industry's ability to continue to restore and maintain its balance sheet strength given the softening commercial insurance pricing environment, legacy liabilities and underreserving issues.

In particular, the report cites the following potential trouble spots:

o Increasing evidence that casualty rates have passed their cyclical peak, making underwriting discipline increasingly important to sustain profits in these lines.

o Little prospect of higher investment returns in the near future even as reinsurers maintain ambitious return-on-equity targets, typically in the mid-teens range, which Moody's believes may lead to an increased risk appetite.

o Uncertainties about reserve adequacy remain, with several leading reinsurers posting higher-than-expected adverse development over the past year.

To the extent that reinsurers continue to experience adverse development on old business, it calls into question the profitability of business written during the more recent hard market, Moody's said.

o Regulatory investigations into finite reinsurance and inappropriate business practices may result in downward rating pressure on some groups, Moody's warned.