Posted on: Saturday, September 18, 2004

Insurance firms weathering the hurricanes

By Meg Richards
Associated Press

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 brewing at sea, this is shaping up as a difficult quarter for property and casualty insurers. But 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.

"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 in New York.

Since Andrew, premiums in the most disaster-prone areas of the state have risen 100 percent 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 $15 billion per year.

As a result of the reforms, the financial burden is substantially lower for companies such as 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 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 Dietze, president of Point View Financial Services Inc. in Summit, N.J. "Afterward 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 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 52-week high yesterday, closing at $48.84 a share.

The company is still calculating damage from the past 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.

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.

"Is it an accident that the centerpiece of Warren Buffet's empire is basically insurance?" asked Dietze, adding "there are a lot of famous investors over the decades that have made a bundle in insurance."