Insurance stocks plummeted on Wall Street yesterday following XL Capital Ltd.'s announcement that it had increased reserves by $200 million to cover losses relating to the September 11 attacks in the US.

The company also expected to report $120 million net investment losses for the quarter ending June 30, 2002, stemming from the collapse of telecoms Worldcom, Adelphia and others.

Brian M. O'Hara, president and chief executive officer of XL, said: "Despite our intensive reserve analysis immediately following September 11, the unprecedented nature of the attacks has resulted in higher losses as information has developed. We believe that increasing our reserves at this time should fully address our exposure to September 11."

The increase in the net loss reserves for September 11 claims consists of approximately $135 million of additional reserves in the company's reinsurance segment, primarily due to higher business interruption losses and exposure to Lloyd's Central Fund, and about $65 million in the accident and health book of the company's Lloyd's operations.

In a statement yesterday, XL said the increase in reserves in the accident and health book at Lloyd's reflected that the company's exposure ultimately included a higher concentration of victims in the World Trade Center than previously indicated.

Net investment losses in the quarter include losses in the company's fixed income portfolio for WorldCom, Adelphia and other telecommunication companies of approximately $92 million and the write-down of the company's investment in Mutual Risk Management of approximately $20 million.

In addition, investment losses include derivative losses and other investment losses net of realised investment gains. However, Mr. O'Hara added: "I am pleased to note that we had minimal underwriting exposure in both our insurance and reinsurance operations to the telecommunications and related industries during the quarter.

"Absent the impact of these charges, we believe our second quarter results should be in line with consensus analyst estimates. I am confident that the recovery underway in the insurance and reinsurance markets is sustainable for the foreseeable future and believe that the need for higher prices is reinforced by the adverse development of recent losses and declines in the investment markets."

Morgan Stanley insurance analysts said yesterday afternoon that the reserve reduced XL's book value by 5.87 percent or, in their estimation, 1.85 percent if other second quarter operating earnings were included.

The analysts said: "The stock is trading at 176 percent of our estimated second quarter book value adjusted for the charges, below our assessment of fundamental value. Accordingly, looked at from a long-term perspective, this morning's reaction would seem to be the normal "piling on" effect in excess of the fundamental impact. We still believe XL will have a good fundamental quarter with outstanding growth and combined rations ex 9/11."

The Morgan Stanley analysts said they had suggested earlier in the year that many companies would have disappointing earnings this year for similar reasons, and added: "Unfortunately, we thought XL would be a safe haven... we were wrong. This, along with PGR's earnings last night reminds us that in nonlife insurance, there really is no such thing as a safe haven, given the nature of the business."

Warning of further industry upheaval, the analysts said it was interesting that the industry's highest quality companies have been the one to take charges early in the year (including Munich Re)

"This suggests to us much more such news is coming from other companies," said the analysts.

The analysts also said the 9/11 claims reported relate to a personal accident "spiral" originating from American United Life and featuring losses from companies like Cantour Fitzgerald and Marsh & McLennan, as well as the cost of reinsuring Lloyd's Central Fund.

"We suspect these cannot add to XL's taste long-term for doing business in the market. XL's Lloyd's operation was an end-stage retrocessionaire of the spiral and thus, received late reported claims. We believe there is another "spiral" involving aviation claims that runs between Lloyd's and Germany. A number of other disputes and issues relating to September 11 remain, that we believe will result in rising loss estimates over time. Loss syndicates in some cases are likely to be unable to close their 2000 and/or 2001 years as a result. Meanwhile, we believe fundamentals in the group continue to improve and all of this, ultimately, should enhance XL's other opportunities. We would buy at the current price, notwithstanding the disappointment."

The Morgan Stanley Analysts added: "Our rating on the property-casualty industry remains Attractive due to our positive outlook on American International Group, Berkshire Hathaway and Allstate which collectively account for roughly 65 percent of the market capitalisation of our coverage universe."

As Insurance stocks slid, several other companies made statements to reinsure investors that reserves were adequate to cover losses relating to September 11.

PartnerRe Ltd. CEO and President Patrick Thiele said yesterday: "Based on regular reviews of our exposure, we are reaffirming that our original net loss estimate from the World Trade Center attack of $400 million remains appropriate."

St. Paul Companies also said yesterday that its reserves for the World Trade Centre Losses were adequate and that no additions to those reserves were required.