Hurricane Rita Adds Billions To Loss Totals

Damages 'minor' compared to Katrina, but latest storm still oneof the worst ever

By mark e. ruquet

While under normal circumstances Hurricane Rita would beconsidered a monumental catastrophe for those affected and theirinsurers, an aggressive evacuation policy kept loss of life to aminimum, and insured losses were relatively minor compared to themassive damage caused by Hurricane Katrina. However, that doesn'tmean the region or the insurance industry got off easy by anymeans.

In fact, when all the damages are tallied, Rita may end up asthe fourth most expensive insured loss in U.S. history.

Following within weeks of Katrina, Rita struck the Gulf Coastbetween Texas and Louisiana on Sept. 24, missing Houston andGalveston, along with much of the region's oil refineries, whichsupply about a quarter of the nation's energy needs.

Insured damage estimates from three modeling firms--AIRWorldwide Corp., Eqecat and Risk Management Solutions--range from$2.5 billion to a high of $7 billion. The high end of lossesexpected from Katrina is $60 billion.

However, if the high end holds, Rita would be among the top-10most costly hurricanes to hit the United States, according to JayGelb, an analyst for Lehman Brothers in New York.

Fitch Ratings noted that Rita was similar in magnitude to 2004Hurricanes Ivan and Frances, which are ranked third and fifth,respectively, on the Insurance Information Institute's top-10 list.Should losses come in at $7 billion, it would make Rita the fourthmost expensive hurricane in U.S. history behind Ivan, but ahead of1989's Hugo, which cost the industry less than $6.4 billion in 2004dollars.

Taking into account loss estimates from Hurricanes Dennis,Katrina and Ophelia, Fitch said this season could cost insurers upto $70 billion--equaling 17.5 percent of the industry's statutorysurplus, or about two full years of statutory earnings.

Standard & Poor's was optimistic about the industry'sability to absorb these latest losses, but is keeping a wary eye ondevelopments. Thomas Upton, a senior credit analyst with S&P,said 13 insurers were placed on Credit Watch out of 80 domestic andglobal companies it contacted.

The 13 carriers cited were ACE, Allmerica Financial Corp.,Allstate, IPCRe Ltd., Lloyd's, Montpelier Re, Oil CasualtyInsurance, PXRE Corp., State Farm Mutual Automobile Insurance,Swiss Reinsurance, Transatlantic Reinsurance, United Fire Group,and XL Capital.

The feeling was these 13 needed to go to the investment marketfor recapitalization of their losses. However, he felt the watchwould be "short term" and would be resolved within 90 days. As asign of how quickly the issue is expected to be resolved, he notedthat Montpelier Re would be removed from Credit Watch because itsecured $600 million in new equity.

"The impact on the insurance industry from Katrina and Rita isunprecedented," said Mr. Upton, noting that the losses are expectedto be three times that of Hurricane Andrew and twice that of9/11.

The fact that insurers are relying on modelers for their lossestimates is a significant problem for the industry, he went on tosay. With flooding keeping adjusters from getting into some areasdamaged by Katrina and Rita, insurers do have not solid numbers towork with.

While few rating downgrades are expected, there are a fewcaveats being expressed by the rating agencies.

A hard market must follow, whether it is regional in nature orextends generally, because lost capital must be replaced, warnedMr. Upton. Some lines might have to endure long-tail effects fromthe storms, he suggested--citing environmental, where claims coulddrag out for years.

Mr. Upton expressed concern that political pressures could alsoaffect the industry. He said there will be those who feel insurersshould go beyond the limits of their contracts to helppolicyholders, noting the suit in Mississippi by Attorney GeneralJim Hood to force homeowner carriers to pay for uncovered flooddamage. Insurers may feel the need to set up separate carrierswithin a state to shield the greater company from losses endemic tothe region, but regulators may oppose the move politically.

"This would be a situation where companies are looking to raiseprices to cover a loss, while regulators look to keep priceslower," he added.

Robert P. Hartwig, senior vice president and chief economist forthe Insurance Information Institute in New York, said even with theadded losses from Rita, the effect on the market will be isolated,with higher costs in homeowners and commercial property insurance,and some auto. Increases would also be focused on reinsurancecatastrophe coverage, but again, the spillover would be limited."The effect will be on a regional basis, and not a general hardmarket," he predicted.

State Farm has the most significant homeowners exposure in Texasand Louisiana, followed by Allstate in both states. Farmers Groupis third in Texas, while Louisiana Farm Bureau is third inLouisiana.

On the commercial property side, St. Paul Travelers is the topwriter in Texas and Louisiana. Zurich is second in Texas, followedby Chubb's Combined Federal Insurance Companies. In Louisiana,State Farm is number two and Zurich is third.

Oil and chemical production liability is also a big concern.While property damage comes immediately to mind, there is a rippleeffect to consider. "The big issue facing the chemical industry nowis restarting operations," said Jim Walters, managing director forAon's chemical industry practice. This delay, he noted, couldtrigger business interruption policies beyond the energysector.

Plants were shut down and evacuated, sparing facilities andlives, but getting the fuel supplies in to operate the plants willbe a challenge with rail lines and highways damaged or blocked byflooding, he noted.

The ripple effect, he pointed out, would be other manufacturersdependent upon the chemical plant's production ceasing operations."If they can't produce and sell, they will sustain their ownbusiness interruption loss," he pointed out.

Other insured exposures triggered by Rita could involve marinecargo, trucking and ocean marine, and possibly environmental, Mr.Walters pointed out. But the main exposure would be property andbusiness interruption, he said.

Pricing could move upward after finally seeing somestabilization. "In our world, we are the first to get hit with thehard market and the last to see the soft," he remarked.

Bruce Jefferis, managing director of Aon Natural Resources, saidRita shut down all production in the Gulf. There were reports thatsome oil platforms were severely damaged, and some weremissing.

"Rita was every bit as damaging a storm as Katrina from anoffshore standpoint, if not worse," said Mr. Jefferis. Whilemissing a good portion of the oil refining industry in Houston andGalveston, where Rita did come ashore--such as in Beaumont,Texas--refinery damage appeared to be minimal, "which is excellentnews," he said.

RMS put offshore platform damage and loss of production fromRita at between $1 billion and $2 billion.

However, until all the offshore drilling stations are inspected,both from above and below the water, any figures on insured lossesfrom Rita "would be a wild guess," he confessed. Anothercomplicating factor, he noted, is that the resources to survey andrepair these damaged facilities were stretched thin by Katrina,meaning it could be months before repairs are made.

Hurricane Rita knocked down power lines, sparking fires in Texasand Louisiana, adding to total insured losses of as much as $7billion.

"The effect [on pricing] will be on a regional basis, and not ageneral hard market."

Robert P. Hartwig, Chief Economist

Insurance Information Institute