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Insurers to Pay Billions for Rita, Only a Fraction of Katrina

Posted on: Monday, 26 September 2005, 15:00 CDT

Insurers including Allstate Corp. and St. Paul Travelers Cos. may pay $2.5 billion to $7 billion in claims from Hurricane Rita, a fraction of what Hurricane Katrina probably cost.

Estimates are low for a storm of Rita's strength because it came ashore over Louisiana's sparsely populated western coast, damage modelers said. Risk Management Solutions Inc. estimated $4 billion to $7 billion, Eqecat Inc. projected $3 billion to $6 billion and AIR Worldwide Corp. forecast $2.5 billion to $5 billion.

At $7 billion, Rita would cost about a third of what some analysts had expected and about as much as Charley and Ivan, two of the record four hurricanes to hit Florida last year. Claims from Katrina may reach $40 billion to $60 billion, making it the most expensive disaster in the industry's history.

"This does not add a great deal of pressure to insurance markets," said Bob Hartwig, chief economist of the Insurance Information Institute, an industry group in New York. Insurers "had already taken it on the chin with Katrina."

With winds of 120 mph, Rita made landfall near the Louisiana- Texas border as a Category 3 hurricane on the Saffir- Simpson scale Saturday. It had been the maximum Category 5 earlier. The storm's turn north Friday over the Gulf of Mexico changed a projected course that may have been devastating for Houston's oil-refining hub.

"It appears that most of the refineries weathered the storm," said Andy Lipow, president of Houston consultant Lipow Oil Associates LLC.

Oakland, Calif.-based Eqecat estimated $9 billion to $18 billion of claims when Rita was still in the Gulf, assuming it would be stronger at landfall and sweep over more densely populated areas. Rita on Sunday was a tropical depression with winds of 20 mph, the Hydrometerological Prediction Center said.

Rita disrupted power to 1.2 million people and flooded communities in Louisiana and Texas. Thousands of Houston residents started to return home Sunday. As many as 3 million people in Texas and Louisiana were ordered to evacuate ahead of the storm.

Investors had been valuing insurance stocks as if there would be $10 billion to $20 billion in insured losses from Rita, Wachovia Corp. analyst Susan Spivak said in a Thursday report. A.G. Edwards & Sons Inc. analyst Paul Newsome had expected $10 billion.

State Farm Mutual Automobile Insurance Co., owned by its policyholders, is the biggest insurer of homes in Texas, followed by Allstate, and Zurich Financial Services AG's Farmers Insurance unit, according to a research report from Merrill Lynch & Co. St. Paul Travelers insures the most commercial properties in the state, followed by Zurich and Chubb Corp., Merrill said.

The 22-member Standard & Poor's 500 Insurance Index advanced 1 percent Friday, the second day of gains after three straight declines, as the storm weakened to a Category 3.

Allstate climbed $2.59, or 5 percent, to $54.53 in New York Stock Exchange composite trading. St. Paul Travelers rose 76 cents, or 1.8 percent, to $42.75.

Risk Management Solutions has the highest estimate on Katrina, at $40 billion to $60 billion. That would be two to three times as expensive as Hurricane Andrew in 1992, and erase as much as 15 percent of the $402 billion that U.S. property and casualty insurers have in surplus, or cushion, for unexpectedly high claims.

"Given the loss of Katrina, another $30 to $40 billion storm would have had the potential to change the pricing dynamics in the industry," said Adam Klauber, an analyst at Cochran Caronia Securities in Chicago.

Instead, insurers will probably continue to lower prices as competition increases, he said. Rates that had surged after the Sept. 11 terrorist attacks and corporate scandals such as Enron Corp. began falling last year.

"You may have a short-lived break from rate-cutting, but it's not going to be long," said Klauber, who's based in Chicago. "Most competitors have plenty of capital and they'll be back at the table trying to get everyone else's customer."

Should Katrina cost $40 billion, Allstate would incur an estimated $2.4 billion in costs, depleting shareholders' equity by about 10 percent, Newsome said. St. Paul Travelers said on Friday that Katrina may cost about $800 million. Allstate and others haven't estimated losses from either storm.

E-mail: jwestbrook1@bloomberg.net

Source: Deseret News (Salt Lake City)

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