Katrina may cost insurers record $26 billion

By Jonathan Stempel

NEW YORK (Reuters) – Hurricane Katrina may be the most
expensive hurricane ever to hit the United States, costing
insurers up to $26 billion, storm modelers said on Monday.

The storm may nevertheless prove less costly than some had
feared because it weakened overnight and its eye veered
slightly east of low-lying New Orleans, by far the most
populous city in Katrina’s path.

“We expect the bulk of damage to be wind-related, but there
is significant flood risk to commercial insurers,” said Thomas
Larsen, senior vice president at one modeler, Eqecat Inc. of
Oakland, California. “The track shifted east 25 miles, which
relieved some pressure on New Orleans.”

Air Worldwide Corp. of Boston estimated a $12 billion to
$26 billion payout, just above Eqecat’s $12 billion to $25
billion forecast. Risk Management Solutions Inc. of Newark,
California estimated a $10 billion to $25 billion payout.

The higher estimates would make Katrina more costly than
Hurricane Andrew, which resulted in $20.9 billion of claims,
after adjusting for inflation, when it slammed into Florida in
1992, the Insurance Information Institute said.

Eqecat cut its forecast for Katrina from as high as $30
billion after the storm tracked east of New Orleans.

Katrina came ashore about 65 miles south-southeast (105
kph) of New Orleans as a Category 4 storm, with winds of 140
miles per hour (225 kph), the National Hurricane Center said.
Mississippi and Alabama were also battered.

Among insurers in afternoon trading, Allstate Corp. was off
88 cents to $57.07; Hartford Financial Services Group Inc.
dropped 93 cents to $73.78, and St. Paul Travelers Cos. fell 32
cents to $44.42.

Among shares of reinsurers, which provide insurance to
insurers, Munich Re dipped 0.5 percent and Swiss Re 0.4 percent
in Europe.

HOMEOWNERS

While regulators often let insurers boost premiums after
they make big payouts, Merrill Lynch & Co. analyst Jay Cohen in
a report said that might not happen this time.

“Events that caused a shift in pricing in the past took
insurers by surprise,” he wrote. “Katrina does not appear to
have such a surprising, unique nature to it.”

It often takes days or weeks after a major storm to assess
damage, and several insurers said it was too soon to estimate
losses.

Katrina may have generated $2 billion in claims after
tearing through Florida on Friday, analysts said. Insurers last
year paid out $22.8 billion for four Florida hurricanes, the
Insurance Information Institute said.

Bob Hartwig, the institute’s chief economist, said payouts
to homeowners may top those for business interruption, “given
that the eye did not go over New Orleans.”

Ray Stone, vice president of catastrophe operations at St.
Paul, said: “A lot of people are breathing a little bit of a
sigh of relief because it weakened slightly, and kept New
Orleans on the weak side of the storm.” St. Paul does not
expect to be able to assess losses before Wednesday.

Andrew came ashore as a Category 5 storm, the most serious
on the Saffir-Simpson scale. It caused about $26.5 billion of
overall damage — including damage not covered by insurance —
before inflation, U.S. government data show. Only three
Category 5 storms have hit the United States.

“GOING TO BE BAD”

State Farm Mutual Automobile Insurance Co. is the largest
insurer of homes in Louisiana and Mississippi. Spokesman Fraser
Engerman said: “Once we get clearance from authorities, we’ll
begin assessing damage. We know it’s going to be bad.”

Allstate, American International Group Inc., the Louisiana
Farm Bureau Mutual Insurance Co. and St. Paul are the next
largest in Louisiana, while Mississippi Farm Bureau Mutual
Insurance Co. and Allstate follow in Mississippi.

Risk Management Solutions said insured property in New
Orleans and surrounding parishes totals more than $110 billion.

Allstate spokesman Bill Mellander said the largest publicly
traded U.S. auto and home insurer is deploying claims adjusters
near where it expects the worst damage.

Losses from the four Florida hurricanes nearly wiped out
Allstate’s third-quarter earnings last year.

Hartford adjusters are preparing to enter affected areas
and may begin assessing damage within a week, company
spokeswoman Victoria Gallant said.