Hurricane Ivan Buffets Insurance Stocks

With a third powerful hurricane moving north toward Florida, shares of property and casualty insurance stocks are starting to bend in the wind.

Forecasters say Hurricane Ivan, currently packing winds of 145 mph as it moves through the Caribbean, could be the most devastating storm of all, leading to an early evacuation of the Florida Keys. Investors are also evacuating.

Over the past two days, the S&P Property & Casualty Index has fallen nearly 2%, as the weather reports have grown increasingly ominous. Shares of some of the biggest insurers in the Sunshine State are bearing the brunt. Buffeted stocks include AllstateALL, the second-largest homeowner insurer in Florida, down 3% to $46.34; ChubbCB, off 1% to $68.72; and St. Paul TravelersSTA, down 1.3% to $33.70.

The losses aren't huge, reflecting a Wall Street debate about whether catastrophes are ultimately good for insurance companies, which can use them to raise premiums. Moderate selling shows the argument is turning in bears' favor, as investors fear a third big hurricane may be too much for the industry to absorb without pressuring third- and possibly fourth-quarter earnings.

The most recent forecast has Ivan scheduled to slam into Jamaica sometime late Friday or early Saturday before heading toward Cuba. If the hurricane stays on its current path, it could reach southern Florida Monday or Tuesday.

Insurance stocks weathered the first two big storms, Hurricanes Charley and Frances, in fine fashion, despite the estimated $14 billion in damages. Some stocks actually rose because the industry is in far better shape to pay off claims following three years of collecting higher premiums from customers. Even with Thursday's selloff, the S&P insurance index is up 4% since Aug. 13, the day Charley made landfall in Florida.

Insurers with big losses also can dip into a $15 billion hurricane fund set up by the state of Florida to lessen some of their burden. The Florida Hurricane Catastrophe Fund, established by the state in the wake of the $20 billion in devastation wrought by Hurricane Andrew in 1992, supplies supplemental insurance for primary insurers.

But investors are now concerned that a third hurricane, especially one with the potential to cause more damage than Charley and Frances combined, could be too much to absorb. Steep payouts not only will further erode earnings, they could also impact some company's credit ratings.

For Ivan to deal that big of a blow to the insurance industry, analysts say it probably would have to rival Andrew in terms of property damage.