Insurance companies enjoy hurricane-free year

By THOMAS LEE
Wednesday, November 08, 2006
FOR BIZ SKED

So much for Katrina, the sequel.

After suffering through the most destructive hurricane season on record in 2005, insurance companies braced themselves for another tough year in the Gulf Coast region. Computer models predicted as many as 10 hurricanes this year, roughly half of them potentially deadly major storms.

Barring any last minute disasters, the final tally of hurricanes to hit the United States this year will stand at ... zero, a number that not even the most optimistic analyst dared to predict.

"What's surprising is this was predicted to be an active hurricane season," said Donald Thorpe, an insurance analyst with Fitch Ratings, a credit rating agency. "That hasn't happened."

No hurricanes means no losses. And no losses means insurance companies such as Allstate Corp. and St. Paul Travelers Companies are suddenly awash in profits. Some analysts think the unexpected windfall might create pressure for lower premiums in the Gulf Coast, where rates rose dramatically after Katrina.

But don't count on it, experts say. If anything, insurance rates are not high enough to cover losses from another Katrina-style catastrophe, industry officials say. Insurers lost $40 billion on Katrina alone, making it the costliest hurricane in history.

"While a below-average hurricane season is certainly a welcome change from the past several years, and perhaps may have some impact upon the market in which we participate, it by no means diminishes our need to properly account for and manage our catastrophe exposures," said Jennifer Wislocki, a spokeswoman for St. Paul Travelers.

And while 2006 was hurricane-free, models suggest the Gulf Coast region still faces decades of powerful hurricanes.

Still, 2006 is shaping up to be a stellar year for major property insurers, a complete reversal from the previous year when the industry suffered $61.2 billion in hurricane-related losses. Higher premiums combined with the lack of hurricanes resulted in some eye-popping third-quarter results.

St. Paul Travelers said third-quarter profits rose more than sixfold to $1.04 billion, from $162 million during the same period a year ago. The company paid out $10 million in catastrophe-related claims in the quarter, compared with $1.01 billion in the 2005 third quarter, most of which came from reserves and was paid out for Katrina and Rita expenses.

Allstate, the largest publicly traded U.S. home and auto insurer, posted a $1.16 billion profit in the third quarter, vs. a $1.55 billion loss last year.

Insurers "have done very well," said Donald Light, an insurance analyst with Celent, a Boston-based management and consulting firm. "They have generated a level of underwriting profits that we have not seen in 25 years. If you are an investor, you have to be happy."

The good financial news is a mixed blessing, though. Fat profits makes the industry a target of public resentment, analysts say, especially because rising insurance rates in the Gulf Coast region makes reconstruction much more expensive.

"Quite frankly, the insurance industry doesn't have the best public image," said Thorpe of Fitch Ratings. "There's usually public pressure to cut rates when there are no storms."

But that's not likely to happen. After Katrina, top catastrophe-modeling firms such as Applied Insurance Research and Risk Management Solutions Inc., which try to predict insurers' financial exposure to hurricanes, readjusted their models to include factors such as wind speed at a particular location, cost of building materials and delays to responding to claims because of floods and damaged roads.

The result was a significant increase in estimated losses. Earlier this year, Risk Management boosted its loss projections by 40 percent for the southeastern United States, Florida and Gulf regions. Credit rating agencies such as Fitch, Standard & Poor's and A.M. Best, which use the models to evaluate the financial health of insurers, now require insurers to carry more reserves to cover the same amount of risk, said Kevin Campion, executive vice president and property casualty expert for Benfield Inc., a Minneapolis-based reinsurance broker.

To raise the extra capital, insurance companies have sought sizable rate increases from regulators in the Gulf Coast. Regulators approved some increases, but insurance company officials say prices are still too low. In Florida, for example, insurers have asked for price rises as high as 90 percent. The state granted about half of that.

In a nutshell, one hurricane-free year does not change anything in the Gulf Coast, experts say. The same underlying factors that make the region a risky place to do business still exist. People continue to flock to homes in vulnerable coastal areas. The region will inevitably suffer more catastrophic hurricanes because of global climate conditions like warmer ocean temperatures.

"Importantly, the consensus opinion is that we are now in the middle of a potentially decades-long era that will likely be characterized by increased hurricane frequency, severity and a larger number of U.S. landfalls," a recent Fitch report said.