Ferocious hurricane
season puts insurance
stocks on investors’ radar

Losses could reach $18 billion
but the industry overall
is doing well

NEW YORK » This year's hurricane season has many homeowners looking more closely at the fine print on their insurance policies, and many investors eyeing the impact on insurance stocks.

With total insured losses from Hurricanes Charley, Frances and Ivan estimated at anywhere from $15 billion to $18 billion, and more storms fiercely brewing at sea, this is shaping up to be a difficult quarter for property and casualty insurers. But as terrible and costly as the damage has been, a number of mitigating factors suggest that the insurance industry will weather the season relatively well.

Floridians may take umbrage, but one thing working in the insurance companies' favor is that so much of the damage occurred in that state, where vast industry reforms after Hurricane Andrew struck in 1992 shifted more of the financial risk to consumers.

The most expensive storm in history, Andrew caused nearly $20 billion in insured damages, and put 11 smaller insurers out of business -- 10 in Florida and one in Louisiana.

"Insurers are far better positioned to be able to withstand large scale shocks of this magnitude than they were in 1992," said Robert Hartwig, chief economist with the Insurance Information Institute, an industry group based in New York. "That doesn't mean it won't be financially painful, but 'financially painful' is several rungs up from having companies go insolvent. We've basically tested the Andrew reforms, and they work."

Since Andrew, premiums in the most disaster-prone areas of the state have risen 100 to 150 percent. Disaster deductibles are now calculated in terms of percent of total property value rather than dollar amounts -- a homeowner might be liable for the first 5 percent of damage rather than the first $1,000.

And a state-sponsored catastrophe fund was established as a sort of insurance for the insurers. Companies have been paying into the fund since 1993; now when hurricanes strike, the insurers are liable for the first $4.5 billion in damage, and anything beyond that is 90 percent covered by the fund, up to a cap of $15 billion per year.

The insurance companies were allowed to further reduce their exposure by dropping coverage of some 90,000 policyholders in high-risk areas, a measure that led to the creation of a new state-sponsored insurer of last resort, Citizens Property Insurance Corp.

And many of the insurance companies established separate subsidiaries just for Florida, which helped limit their overall liability.

As a result of the reforms, the financial burden is substantially lower for companies like mutual insurer State Farm Insurance Cos., which holds the largest share of Florida's market at 23 percent, Allstate Corp., the largest publicly traded company issuing policies in Florida, and Chubb Corp., which focuses on high-end consumers. But in the short term, disasters can cause a great deal of share price volatility.

"Stock prices tend to weaken in anticipation of storms. ... Basically there are no buyers as people are kind of frozen in the headlights," said David G. Dietze, president of Point View Financial Services Inc. in Summit, N.J. "Afterwards there tends to be a relief rally as people get out from under their beds and realize the world has not ended. From there, of course it depends on where premiums are going."

Hurricanes can be a great advertisement for the insurance business, Dietze noted. Demand among consumers rises, the companies sell more policies, and market conditions may allow for a hike in premiums. Investors seem to be showing confidence in the stocks; the Standard & Poor's insurance index is outperforming the market as a whole, and Allstate reached a new 52-week high yesterday, rising 76 cents to close at $48.84 a share.

The company is still calculating damage from the last two storms, but it recently estimated total after-tax losses from Hurricane Charley, which sliced across the state on Aug. 14, at about $276 million, or 40 cents per share. The company reports third-quarter earnings Oct. 20.

"It's clear the third quarter will have a higher than average loss amount in terms of catastrophe business. ... It's a big number," said Allstate spokesman Michael Trevino. "But from a financial perspective for us, its reasonably manageable."

To put things in perspective, for all of 2003, Allstate saw total catastrophic losses of $1.49 billion, largely due to wildfires in California, but still managed to record net earning of $2.7 billion, or $3.83 per share.

Insurance companies may further cushion themselves against losses by purchasing reinsurance from other carriers, such as ACE Limited, RenaissanceRe Holdings Ltd. or General Re Corp., a subsidiary of Warren Buffet's Berkshire Hathaway group, which also includes National Indemnity Company and Geico Corp.