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Insurers Survey the Damage

By Beth Piskora Now that Hurricane Katrina has completely passed through the Gulf of Mexico and Gulf Coast area, federal, state, and local governments, aid workers, and insurance companies face the difficult task of repairing a badly damaged infrastructure, sheltering and feeding the suddenly homeless, and compensating businesses and homeowners for their losses.

Insurers haven't yet had a chance to calculate the damage from this storm. Estimates span a wide range, from a low of $9 billion to a high of $28 billion.

"There's a lot of uncertainty about this storm's damages," says Cathy Seifert, insurance analyst for Standard & Poor's Equity Research. "So far, because of the flooding, it has been hard to get a sense of extent of the losses."

KATRINA VS. ANDREW. She notes that the full impact from the energy market is still unknown. "We believe several oil rigs in the Gulf of Mexico were damaged, but we don't know the extent of the damages," she says.

Seifert has made no changes to her investment recommendations for insurance stocks after analyzing the effects of the storm. She points out that although 4 of the 10 costliest hurricanes on record occurred in 2004, the insurance industry still managed to earn an underwriting profit, despite paying out higher-than-expected claims.

She also notes that many market participants are comparing this storm to Hurricane Andrew. The Insurance Information Institute says it expects Katrina will cause the industry to pay out more than the $15.5 billion in insurance claims resulting from Andrew, which devastated southern states in 1992. The industry's payout for Andrew comes out to more than $20 billion if adjusted for today's prices.

UNDERESTIMATED RISKS? Seifert says since 1992 the insurance industry has made crucial changes in how it operates. For one, she says, insurance companies have invested in far more sophisticated catastrophe modeling tools since Hurricane Andrew.

Still, Seifert has concerns about the sector's exposure to claims from oil exploration and drilling companies and refiners. In recent years, she explains, many commercial insurers moved aggressively into the marine and energy markets, since they were one of the few places where insurers were able to charge high premiums.

However, speculation was circulating in the industry, even before Katrina tore through the Gulf, that some of the underwriting of marine and energy policies underestimated the risks.

"VERY OPAQUE." American International Group (AIG

; ranked 3 STARS, or hold; recent price: $59) is known to have a significant business in underwriting marine and energy policies.

Other companies that had talked about shifting capital to marine and energy underwriting include XL Capital (XL

; 2 STARS, or sell; $70), Ace Ltd. (ACE

; 3 STARS; $44), Aspen Insurance Holdings (AHL

; 4 STARS, or buy; $28), RenaissanceRe (RNR

; 3 STARS; $45), Platinum Underwriters Holdings (PTP

; 3 STARS; $33), and Endurance Specialty Holdings (ENH

; 3 STARS; $37). Seifert says it's not certain if any of these companies are exposed to any insurance claims likely to arise from the hurricane.

"The catalyst for the commercial insurers is resolution of these energy issues," she says. "Right now, the situation is very opaque. We need to get some transparency on how much exposure these companies have to Katrina claims."

FLOOD FACTOR. Seifert is also closely monitoring the property and casualty insurers for estimates of their exposure to claims arising from this storm. She notes that flooding may account for a greater percentage of total Katrina-related losses than from other storms.

This is an important point because the typical homeowner's policy excludes damage caused by floods. However, many commercial policies may cover some of the damage incurred to businesses as a result of flooding. This could increase the financial burden placed on commercial-lines insurers.

Based on her analysis of market-share statistics, Seifert sees Allstate (ALL

; 5 STARS, or strong buy; $57) and St. Paul Travelers (STA

; 3 STARS; $44) as having the highest exposure to the storm-affected area.

Piskora is managing editor of S&P Global Editorial Operations

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