Hurricane Ike's Toll in Texas May Cost Insurers $18 Billion

By Erik Holm

Sept. 14 (Bloomberg) -- Hurricane Ike, the storm that came ashore in Texas yesterday, may cost insurers $6 billion to $18 billion, according to firms that specialize in gauging the effects of disasters.

The highest estimate came from Oakland, California-based Eqecat Inc. as Ike drove the Gulf of Mexico's waters into Galveston Island, blew out office windows and left at least 4.5 million people around Houston without power. AIR Worldwide, based in Boston, said Ike may have caused as much as $12 billion of insured losses on land, with a likely loss of $10 billion. Offshore losses may range from $600 million to $1.5 billion and probably totaled $1 billion, AIR said.

AIR and Eqecat agreed that $8 billion was the minimum toll, making Ike at least the fourth most-expensive storm in U.S. history. Ike was the first hurricane to hit a major U.S. metropolitan area since Katrina devastated New Orleans in 2005, costing insurers $41.1 billion. Ike made landfall in Galveston with winds as high as 110 miles an hour (175 kilometers an hour).

``The damage won't be confined to the coast,'' Peter Dailey, director of atmospheric science at AIR, said in an interview. ``Damage from hurricane-force winds will extend well inland, maybe as much as 200 miles.''

A third firm, Risk Management Solutions Inc. of Newark, California, said total insured damage on land and offshore ranged from $6 billion to $16 billion.

Early damage reports indicated that several buildings lining Galveston's seawall were destroyed, and unchecked fires were burning in that city, AIR said. President George W. Bush cleared the way for Texas to receive federal disaster aid.

Storm Surge

Ike had been downgraded to a tropical storm at 1 p.m. local time, as sustained winds decreased to about 60 mph, the National Hurricane Center said.

The storm was strengthening until the moment it reached shore and rivaled Katrina in size, if not intensity, said Tom Larsen, a senior vice president at Eqecat.

Ike's width ``is a big part of why we think the damage will be what it is,'' Larsen said. The storm was blowing as high as 125 miles from the storm's center, leaving property ``exposed to hurricane-force winds for hours and hours as the storm passes over,'' he said.

Flagstone Reinsurance Holdings Ltd., the Bermuda-based insurer, predicted damage of $10 billion to $16 billion industrywide. Deloitte Touche Tohmatsu said earlier this week that the storm might cost $25 billion, an estimate that the firm's Lis Gibson repeated after Ike hit.

String of Storms

``It stayed on course and pretty much made landfall where it was expected,'' she said. ``It's hard to know an exact number, but it's certainly in that order of magnitude. It's a big loss. There's a significant amount of property that was hit by the storm.''

Ike follows Hurricane Gustav, which struck Louisiana on Sept. 1, and Hanna, the tropical storm that made its way up the Eastern seaboard on Sept. 6. The storms may reduce profits for insurers, including Allstate Corp. and Travelers Cos., which benefited from calmer weather in 2007 and 2006 after Katrina contributed to a record storm season in 2005.

The spate of natural disasters is testing insurers' efforts to limit losses after the 2005 season. Companies bought added protection from reinsurers, sought price increases from regulators and reduced the amount of coverage in catastrophe- prone regions to reduce their potential claims from the next big storm.

`Pretty Scary'

In Texas, Allstate stopped offering residential coverage for windstorm damage to new customers in 14 counties that face the Gulf of Mexico, passing that part of the policies to a state-run pool. It also instituted a new deductible of at least 2 percent of an insured house's value that new customers must pay before coverage kicks in after a hurricane.

Allstate, the largest publicly traded U.S. home and auto insurer, also sold $250 million in catastrophe bonds to fixed- income investors who bet against the occurrence of natural disasters in the state.

George Ruebenson, the head of Northbrook, Illinois-based Allstate's home and auto units, told investors in New York this week that Ike appeared to be ``pretty scary'' as it approached the Gulf of Mexico. He made no estimate of potential damages.

Data on insured losses understate actual damage because the figures don't include uninsured property or destruction caused by actions excluded from some policies, such as residential flooding.

To contact the reporter on this story: Erik Holm in New York at eholm2@bloomberg.net.