Through the Roof

By THOMAS McCARROLL

IN THE DAYS IMMEDIATELY FOLLOWing Hurricane Andrew's deadly visit to South Florida, Allstate Insurance hastily dispatched more than 2,000 extra claim adjusters to the devastated area to assist the 200 stationed there. Many of the reserves arrived in convoys of motor homes. Others flew in from as far away as Alaska and California. Since the storm had knocked out telephone lines, Allstate rushed to set up its own communications system, consisting of 80 shortwave radio units, 850 pagers, 173 cellular phones and a toll-free number. Allstate expects to pay out $1.2 billion to cover more than 121,000 damage claims as a result of Andrew.

All told, U.S. property and casualty insurers have been hit with more than $8 billion in Andrew-related claims, making the hurricane the most costly single calamity to strike the industry since the San Francisco earthquake and fire in 1906 (cost: $6 billion, after inflation). With claims continuing to pour in, Andrew threatens to take a painful toll on the already battered property-casualty insurance industry and its 100 million policyholders. The final bill, analysts predict, is likely to top $10 billion. While most well- capitalized insurers are expected to weather the storm, less anchored firms are in danger of being blown away, leaving consumers stuck with the tab. Says Sean Mooney, senior researcher at the Insurance Information Institute: "It will take years before the industry digs itself out from the wreckage left by Andrew. Some ((companies)) will be buried by it."

Hurricane Andrew is the latest in a string of mishaps to plague the insurance industry this year. In April an overflowing Chicago River flooded the city's downtown district, costing insurers $300 million in claims. A month later, Los Angeles was rocked by the worst civilian riot in the U.S. since the Civil War. The insurance toll: $1 billion. Then came a series of major hailstorms in Texas, Florida and Kansas. They cost insurers a combined $700 million. And two weeks after Andrew, another lethal hurricane, Iniki, smashed into Hawaii, causing $1.4 billion in damages. In all, property and casualty insurers have paid out a record $13 billion in claims so far this year, far surpassing the previous high of $7.6 billion in 1989, the year of Hurricane Hugo and the Bay Area earthquake. Just as in that year, when those catastrophes were followed by substantial increases in insurance premiums, insurers are already lobbying for rate relief.

The spate of disasters comes as the industry as a whole is struggling to cope with a series of cataclysmic burdens. Life insurers, for instance, have their hands full with the AIDS epidemic, which is costing the industry more than $1 billion a year. Mounting product-liability claims, including asbestos and pollution damages, are running at $10 billion annually. Insurers are also still recovering from a decade's worth of bad investments in savings and loans, junk bonds and real estate. Says Roger Joslin, chairman of State Farm Fire & Casualty: "This traumatic period is unprecedented in the history of the insurance industry."

Perhaps the most traumatized have been property-casualty insurers, which account for 33% of the industry's revenues of $700 billion. Even before Hurricane Andrew, trouble was brewing. It took Andrew, however, to expose the industry's shortcomings and unmask the weaker players. Such major insurers as State Farm (surplus capital: $18 billion) and Allstate ($8 billion) will have enough financial staying power, but some less capitalized firms are getting wiped out. Last week the Florida department of insurance seized two insolvent insurers, Florida Fire & Casualty in Fort Lauderdale and Great Republic in Miami, and placed about a dozen others on its "watch list." MCA Insurance, a division of Tulsa-based Thrifty Rent-a-Car, was placed under supervision by Oklahoma regulators after it was overwhelmed by $30 million in Andrew-related claims. States typically bail out failed firms through guaranty funds financed by assessing a fee on other insurers.

Despite being well cushioned, large insurers are also coming under scrutiny. Moody's Investors Service, a top Wall Street investment-rating agency, last week lowered the credit rating of Sears, Roebuck because of losses at its Allstate Insurance unit. The action took place just before Sears announced its decision to sell off 20% of the big insurance company in a spin-off of the retailer's financial units. Prudential Insurance, which injected $900 million in capital into its property-casualty division after it was hit with $1.2 billion in Andrew-related claims, was placed on review by both Moody's and Standard & Poor's. E. Michael Caulfield, president of Prudential Property & Casualty, argues that the moves are unwarranted considering the industry's large capital base. "Wall Street is overreacting because the numbers are so big and scary."

Few analysts expect that insurance failures will occur on the scale of the savings-and-loan crisis. Insurance firms tend to stand on a more solid financial footing than banks and thrifts. State regulators generally require insurance firms to keep on hand $1 of capital for every $3 of outstanding obligations, compared with a ratio of 1 to 12 for banks.

Even so, analysts are concerned that the industry's exposure to Hurricane Andrew will grow as households and businesses gather more information about their losses. Many insurers have already had to increase their damage estimates. State Farm, the largest insurer in the area, with 23% of the South Florida market, raised its loss estimates to $1.5 billion from $750 million. ITT said last week that it would take a net charge of $582 million against third-quarter earnings to cover losses in its Hartford insurance unit. Hartford's claims from hurricanes Andrew and Iniki total $95 million.

Ironically, after the claims are paid, Andrew and the year's other disasters could eventually spell relief for the remaining healthy insurers. Before the storms hit, the industry had been embroiled in a long and painful price war. Since 1987, property-casualty premiums paid by households and businesses have dropped an average of 40%. The intense discounting, and the sluggish profits that went with it, has touched off an industrywide shake-out. State Farm, the nation's largest property-casualty insurer, has racked up underwriting losses of $7.2 billion in the past four years, due largely to price competition and rising claims. In response to softening profitability, Aetna Life & Casualty will pare 4,800 jobs from its payroll by 1994, including 2,600 this year. Some insurers are even abandoning the market. Transamerica put its property- casualty division up for sale two months ago. So far, no takers.

Fortunately for the industry, costly catastrophes tend to extinguish price wars by squeezing discounters out of the market and by presenting survivors with a can't-miss opportunity to raise rates. In the aftermath of Hugo, South Carolina premiums increased an average of 3.5%. Most analysts expect rates in South Florida to rise at least 10% in 1993, meaning the average annual premium for homeowners will reach $440. Average auto-insurance rates could hit $1,050 next year, up $50 from 1992. However, a senior-level insurance executive contends that insurers would be justified in doubling or tripling prices in all coastal areas that are potential hurricane targets, given the industry's exposure to claims in those regions.

Before raising rates, though, insurers must persuade state regulators of their need to do so, and that won't be easy in Florida and Louisiana. Two days after Andrew struck, the National Insurance Consumer Organization disclosed an embarrassing internal memo from Jeffrey Greenberg, executive vice president of American International Group. In the Aug. 26 memo, Greenberg described the storm as "an opportunity to get price increases now." He urged AIG executives to prepare clients for a rate boost. "Please get it moving today," he wrote. The memo touched off a maelstrom of outrage. Insurance commissioners in Louisiana and Florida immediately slapped a 60-day freeze on AIG's rates. Florida insurance commissioner Thomas Gallagher, who launched a ) probe into AIG's rate-setting practice, also sent letters to the chief executives of the state's 780 licensed insurance companies warning them that regulators "will reject any effort to take advantage of consumers."

Consumer groups oppose any attempt by insurers to spread the costs over the whole U.S. marketplace. Says J. Robert Hunter, head of NICO: "The industry wants all of America to pick up the tab." Insurers deny the charge. Says Edward Young, a group vice president at Allstate: "Rates in Georgia aren't going up because Florida had a hurricane." Another question is whether regulators will allow insurers to charge more in order to replenish their surplus capital. Property-casualty insurers in the U.S. have a total of $160 billion in surplus capital. Analysts estimate that the firms will need to set aside an additional $40 billion in capital to replenish reserves after this year's stretch of disasters. While most firms will be able to fortify reserves without endangering their net worth, many fringe firms could face insolvency. In those cases, state regulators may be called in to fill the void through guaranty funds.

The industry will be helped by the continued consolidation. With fewer players, especially discounters, price wars are likely to come to an end. The loser, though, could end up being consumers, who will face higher prices and fewer bargains -- especially in hurricane country.

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CREDIT: NO CREDIT

CAPTION: Estimated insured property loss caused by catastrophes