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Claims to Property Insurers
Could Be as Much as $60 Billion

September 12, 2005

The estimated claims costs for property-casualty insurance companies from Hurricane Katrina have soared to as high as $60 billion, heightening the likelihood that some insurers will be hurt by the storm.

With a $60 billion ceiling, the newest revision by a risk-modeling firm is nearly double estimates of just a week ago. Citing "catastrophic and unparalleled losses," Standard & Poor's Ratings Services on Friday put the ratings of 10 insurance groups on watch for possible downgrade.

Among them are the nation's two biggest insurers of cars and homes, State Farm Insurance Cos. and Allstate Corp. S&P's list also cited commercial insurers, including Lloyd's of London. Some commercial insurers are exposed through their sales of "business-interruption" policies, which cover certain expenses and lost profits of businesses. Costs on these policies have mounted as a result of the evacuation order in flooded New Orleans. Lloyd's also is a big insurer of offshore energy installations.

 See complete coverage.

A State Farm spokesman said the company's "main focus right now is finding and helping our customers," adding that "State Farm has adequate resources to handle the claims from this storm." In a statement, Allstate noted its "substantial financial strength and liquidity to support our commitments from Hurricane Katrina," adding: "It continues to be far too early to speculate on damages and dollars until we can get into New Orleans."

A Lloyd's spokesman said the market's insurers are assessing damage from Hurricane Katrina but added that S&P had assured it "that they have no concerns with the underlying solvency of Lloyd's, and, if there were a downgrade, it is not likely to be more than one notch." Other insurers reached over the weekend declined to comment on S&P's conclusions.

S&P noted that Hurricane Katrina had resulted in "an unusually wide and fast-evolving range" of damage. Early last week, the high end of the range of estimates by risk-modeling firms was $35 billion. Now, total insured and uninsured costs are expected to top $125 billion, according to Risk Management Solutions, of New York, which provided the $60 billion figure for private-sector insurers.

At $60 billion, Katrina's toll would nearly triple the damage caused by the previous costliest U.S. hurricane, Andrew in 1992. It still likely would be manageable overall, because the U.S. industry has just over $400 billion in capital; non-U.S. insurers are estimated to have an additional $300 billion or so in capital.

S&P's move highlights "the continued material uncertainty in accurately quantifying the insurance industry's ultimate exposure," said S&P analyst Steven Ader, adding that downgrades "are not inevitable." Still, unless some insurers raise additional capital, "as losses grow, greater quantities of ratings will be lowered, and the ones that are lowered will be lowered by more notches," S&P said in its release.

In recent days, insurance adjusters and other experts have gotten into the areas hardest hit by the hurricane and begun to survey damage. The cost estimates began rising within days of the Aug. 29 landing of the Category 4 storm on the Gulf Coast, which was followed by flooding in New Orleans.

Looting and fires added to the damage in the city, as has pollution in the flood waters, which could spur litigation. In addition, private-sector employees injured or made ill while working in the flood zone could file workers' compensation insurance claims, further raising insurers' costs, insurance-industry consultants and lawyers said.

Sellers of home insurance, meanwhile, could face billions of dollars more in claims costs if some class-action lawyers and government officials succeed in forcing insurers to pick up costs from flooding, even though standard homeowners' policies have excluded flood damage for decades. Most U.S. flood insurance is sold by the federal government, but the majority of homeowners in the flooded areas aren't believed to have bought the specialized policies.

In instances of houses damaged by both wind and flood, disputes already have surfaced. Mississippi insurance regulators last week asked insurers to give policyholders the benefit of the doubt in assessing claims. Insurers maintain they shouldn't be obligated to pick up flooding costs because they weren't paid to bear the risk.

Among other insurance groups on S&P's watch list: Allmerica Financial Corp., Montpelier Re Holdings Ltd., PXRE Group Ltd.'s PXRE Corp. and Swiss Reinsurance Co.

Swiss Re declined to comment on the report. Swiss Re on Aug. 31 estimated its exposure to Hurricane Katrina at about $500 million before tax, based on total insured damage of $20 billion.

A.M. Best Co., another ratings firm, said Friday that it expects some downgrades of reinsurers, but didn't specify companies. Reinsurers contract to take on some of the risk of losses on policies that insurers sell to individuals and companies.

--Charles Fleming contributed to this article.

Write to Theo Francis at

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