Standard & Poor’s said today that the economic repercussions of the September 11 attacks on New York and Washington are, in the near term, likely to increase the volatility of investment returns for insurance companies operating in Asia’s emerging economies and worsen the loan quality of banks in the region.

The U.S. economy is likely to enter a moderate and short recession with GDP declining by 0.5% to 1.0% in the third and fourth quarters of 2001, with a recovery beginning only in the first quarter of 2002, says S&P.

“While the attacks are not expected to severely undermine the U.S. economy or trigger a collapse of the U.S. financial markets, the initial response has been a flight to safety, currency volatility, and a sharp fall in prices across a wide range of securities and commodities — a pattern to be expected in times of stress.”

Insurers in emerging Asian markets are likely to be affected by exposure to investment volatility more than by exposure to claims, it says. The impact on balance sheets and profitability could be significant though, it says. “However, the ratings on subsidiaries of foreign insurers may be affected in the event that their parent companies incur major claims as a result of the attacks on U.S. targets.”

“For the overwhelming majority of insurance companies in emerging Asia, diminished investment returns and depressed asset values are likely to weaken profitability and capital strength, particularly if sentiment towards portfolio investments in the region becomes even more bearish,” says Standard & Poor’s. “For banking systems in emerging Asia, the knock-on effects of the widely-expected U.S. recession are likely to accelerate the worsening loan quality already evident in some banking systems in the region.”

Standard & Poor’s has placed its ratings on five Japanese life insurers, Asahi Mutual Life Insurance Co., Meiji Life Insurance Co., Mitsui Mutual Life Insurance Co., Sumitomo Life Insurance Co., and Yasuda Mutual Life Insurance Co. on CreditWatch with negative implications.

“The CreditWatch placement reflects heightened concerns over capitalization levels at the companies. The five insurers have been adversely affected by their relatively high exposure to volatility in the domestic stock market and the prolonged weakness in the Japanese economy, which is expected to deteriorate further in the short term,” it notes.