While the industry continues to feel the negative financial fallout from two of the worst hurricanes to hit the United States, carriers might feel as if they got a break, as insured losses from Hurricane Katrina ended up at about half the highest loss estimate.

A survey by the Insurance Services Office found that insured losses from Katrina were $34.4 billion. The Property Casualty Insurers Association of America noted that commercial losses alone were $12 billion.

The ISO survey confirms that Katrina was the most expensive catastrophe in U.S. history by a wide margin. The next worst storm, Hurricane Andrew in 1992, cost the industry over $20 billion in inflation-adjusted dollars.

However, the ISO estimate is still almost half of the highest guesstimate put out by Risk Management Solutions, a modeling firm, which early on predicted that losses would range from $40 billion to as bad as $60 billion.

Stamford, Conn.-based Towers Perrin weighed in on the losses this week, putting its own estimate at between $40 billion and $55 billion for Katrina. The figure did not include estimates for Hurricane Rita, which modelers say caused between $3 billion and $7 billion in losses. At the high end, Rita could end up as the fifth-worst insured loss.

However, questions remain over how much insurers will be on the hook for in the end. AIR Worldwide, a modeling firm, estimated the total of all water-related property damage from Katrina would be $44 billion, half of it in New Orleans.

With a lawsuit filed in Mississippi by the state's attorney general as well as private suits challenging insurer flood exclusions, the ultimate cost of the two hurricanes have yet to be settled for carriers.

"I would not want to predict how the courts will act in that area," said Donald Light, an analyst for Celent, a research and consulting firm. He noted that the state legal system will be faced with an argument that public policy requires the invalidation of insurance contracts.

He went on to suggest that some insurers might decide it is better to reach settlements now than to "throw the dice in court."

"I hope the industry can be fair and a little generous [to policyholders] without endangering their solvency," said Mr. Light, "but this will play out over a period of time."

"I'm not surprised by the divergence of opinion over the estimates," said Chris McShea, national director of Ernst & Young's Insurance Actuarial and Advisory Service Property-Casualty Practice. He suggested one side of the estimates may assume "clean coverage," while others are taking complications into account.

"Typically, adjusters can get into an area and tell quickly what the claim is and come to a settlement," he said. "We are not getting that here."

More individual insurer loss figures were released last week, but these are all initial estimates and subject to uncertainty as adjusters continue to work, the carriers said.

o Zurich Financial Services said it expects to report losses totaling $725 million from Hurricane Katrina.

o PartnerRe Ltd. put its loss estimate at between $560 million and $590 million on a pretax basis, which included Katrina, Rita and flooding in Central Europe.

o Farmers Insurance Group of Companies said its loss estimate would run between $200 million and $220 million from three states--Louisiana, Mississippi and Alabama, even though the company said it writes only 3 percent of those markets.

Major insurers are expected to be able to absorb the losses. According to a report on first-half, industrywide results from ISO and PCI, insurer net income increased by almost 30 percent through June 30--although Katrina and Rita more than took back all the profits earned by the industry this year.

Robert Hartwig, senior vice president and chief economist at the Insurance Information Institute, said while the industry will take a severe hit in the third quarter, it should rebound in the fourth.

However, such optimistic outlooks did not prevent rating agencies from continuing to review or downgrade some carriers. Quanta Reinsurance Ltd. and Aspen Insurance Holdings Ltd.--both based in Hamilton, Bermuda--were added to the list of carriers that raters are watching.

Some insurers have turned to the capital markets to shore up their books. PXRE and ACE Ltd. announced plans to sell stock to raise close to $1 billion between the two. For ACE, that meant removal from Standard & Poor's Credit Watch list.

Recognizing the need for insurers to raise capital, the U.S. Securities and Exchange Commission said it would issue new rules to make it easier for insurers to enter the equity market. However, the new regulations would not negate regulatory oversight, the SEC said.

The severe storm losses reverberated throughout the upper layers of reinsurance coverages, which likely means premium hikes that could be equal to those insurers saw after 9/11--but it's still too early to know how high the increases will go, said Damien Margarelli, a rating agency analyst with S&P.

He noted that in the aftermath of the World Trade Center attack, industry losses of more than $20 billion prompted reinsurance rates to double or more.

In Florida, however, after four hurricanes swept through the state last year, rate increases were between 20 percent and 25 percent. He said the losses from Katrina would mean increases above the 20-to-25 percent mark, but S&P is not certain the increases would approach post-9/11 numbers.

Simon Marshall, a credit analyst for S&P, said the pressures on the reinsurance industry from the hurricane losses would likely induce a hard market in that sector. Increased frequency of large loss events, the ability to raise new capital, availability and affordability of retrocessional coverage, and difficulty in modeling catastrophe events are some of the concerns that have prompted a negative outlook in this sector, he added.

Downgrades, he said, might result if there are more loss events or damage estimates turn out to be understated--although strong performance could result in a stable outlook later on, he added.

Mr. Margarelli of S&P, discussing global reinsurance, said the combination of the hurricanes striking the United States and the record number of typhoons hitting Japan has "surprised the industry. The key issue is whether the industry can increase premiums...to charge for the increasing probability of higher losses."

In the personal lines area, Polina Chernyak, an S&P analyst, said increases are expected to be regional in nature and could run anywhere from 10-to-30 percent, especially in Louisiana and Mississippi.

On the commercial side, another S&P analyst, John Iten, said commercial property would see a hard market as a result of the hurricanes, after significant softening. He would not speculate on how much the increase would be, but said the hardening would be better if it were national instead of regional.

On the question of rates, Mr. McShea with Ernst & Young said one major issue is the political fallout from the storms, as policyholders are likely to balk at paying substantially higher premiums "for a long time" and regulators might look to hold down increases as a result. He suggested that regulators and carriers should be sitting at the table now, discussing such issues.

"Rate suppression leads to a dysfunctional market," he noted.

With everyone still trying to regain their balance after the double whammy of Katrina and Rita, there was one more piece of unnerving news. Hurricane expert William M. Gray and his team at the University of Colorado predicted three hurricanes for October--one of them major.

Caption For Worst 10 Losses Graph:

While there's no doubt Katrina is the worst U.S. insured loss ever, it remains to be seen where Hurricane Rita will end up. It could be the fifth-worst, or finish out of the top-10.

Caption for Cow Picture:

One analyst noted that with lawsuits mounting over flood-related claims, some insurers might decide it is better to reach settlements now than to "throw the dice in court."

Callout:

Hurricane experts predict three more storms for October, one of them major.