[StBernard] Calm after storms brings windfall for insurers

[Westley Annis]

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.
 
In Minnesota, homeowners' premiums are set by local conditions and therefore
not affected by the Gulf Coast, according to insurance industry officials
and the state Department of Commerce.
 
Results 'not seen in 25 years' 
 
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."
 
Since June, St. Paul Travelers stock has jumped 21 percent to Friday's close
of $51.14. In the same period, Allstate shares rose 16 percent to $61.48.
Over the past three months, the S&P 500 property casualty index increased 12
percent.
 
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.
 
Still risky 
 
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.
 
In the end, the market will set insurance prices, analysts say. After
Katrina, many insurance companies reduced their coverage or pulled out of
the market all together. 
But if the region manages to avoid major hurricanes and insurers continue to
generate strong profits, new companies will move into the region, resulting
in lower prices as insurers compete for business and market share. St. Paul
Travelers, which had stopped writing new policies immediately after Katrina,
is once again looking for new customers in the region.
 
"Insurance is like any other business," Thorpe said. "When profits are poor,
people will leave. When profits are good, people will return."
 
That is, until another Katrina shows up and wipes out those profits.
 
"People don't understand the magnitude and potential for losses," said
Campion of Benfield. "In the industry we have a saying: To make a small
fortune, start with a large fortune."