Insurance Firms Battered by Storm Losses

Insurance companies are bracing for lower earnings, higher reinsurance costs, and as much as $7 billion in claims from just one of a series of natural disasters this year. Historic floods are forcing the evacuation of thousands of people in states from Illinois to the Gulf of Mexico. All this, and hurricane season has yet to start.

Is it really surprising that some of the country's biggest property and casualty insurers have already raised rates and others plan to do so? Blame it on some of the wickedest weather in recent memory, including the most deadly tornado outbreak in the US since 1925. Violent thunderstorms and tornadoes ripped through the South late last month, killing 354 and leaving thousands homeless in seven states.

Leading catastrophic risk modelers -- EQECAT Inc., AIR Worldwide Corp., and RMS -- predict the storms will generate at least $3.7 billion to as much as $7 billion in claims for damage to residential, commercial, and industrial properties, personal possessions, and cars and trucks. Boston-based Liberty Mutual Group Inc. estimates actual losses will climb even higher -- to somewhere between $10 billion and $15 billion.

Matthew Nielsen, product manager at RMS, says the tornado outbreak could possibly be "the costliest severe convective storm event in US history."

State Auto Financial Corp. (Nasdaq: STFC) will have $75 million to $85 million in catastrophe losses this quarter; Allstate Corp. (NYSE: ALL) will have about $1.4 billion in losses; and Germany-based Munich Reinsurance Co. -- 10% owned by Warren Buffett -- estimates it will have $212 million in claims.

Property owners from Alabama to the Carolinas are still assessing the damage from those tornadoes and storms. Meanwhile, the Mississippi River is overflowing its banks, inundating homes, businesses, and farmland -- and creating additional billions of dollars in damage.

Only a fraction of the predicted losses will result in insurance claims, since flooding is typically not covered by homeowner policies. However, insurance companies still face risk: A few allow homeowners to buy optional flood coverage, and most standard auto policies cover flood damage.

To protect homes from flood damage, most homeowners elect federal flood insurance. Just this week, the House Financial Services Committee unanimously passed legislation that would extend the National Flood Insurance Program by five years. The bill also includes several reform measures designed to help the financial stability of the program, which is reportedly more than $18 billion in debt. The bill will be sent to the full House, which is expected to take it up once lawmakers return from recess next week.

A.M. Best Co. believes US primary insurers will face higher reinsurance costs at the upcoming July 1 renewals. (Insurance companies buy reinsurance to protect themselves from massive losses by transferring some of their risk to another insurer or reinsurer.)

The higher reinsurance cost is the result of natural disasters as well as enhanced catastrophic prediction models. Forecasters predict three to five intense hurricanes in the Atlantic basin this season, greater than the long-term average of two to three intense storms.

While natural disasters have been hard on insurance companies, rising premiums are still unwelcome news for homeowners struggling with falling home prices. Insurance rates are not dependent on home prices, and insured values do not necessarily correlate with fair market values. Rather, homeowner's insurance reflects the cost to rebuild in the event of a total loss. So owners are increasingly forced to insure their homes for more than market value if they want complete coverage.

And property insurance costs are climbing. Florida regulators just approved an average rate hike of 18.8% for Florida homeowners covered by State Farm, a hefty hit but significantly less than what the state's biggest private property insurer had wanted. State Farm increased homeowner's rates 7.3% on average last year and has raised rates in 18 states this year, while cutting rates in just two.