Loss Estimates for Quake May Be $1 Billion Low : Insurance: S&P; rating agency says total could be closer to $3.5 billion and that several small companies face failure.

A major insurance rating agency said Wednesday that the industry’s official loss estimate for the Northridge earthquake--$2.5 billion--may be $1 billion too low.

Standard & Poor’s Insurance Rating Service also said a number of smaller insurers--particularly those heavily concentrated in California property insurance--are vulnerable to failure, if not from the Jan. 17 earthquake, then from catastrophes to come.

Also Wednesday, Farmers Insurance Group, California’s third-largest homeowners insurer, said it expects its quake-related claims to reach $600 million.

Steven Dreyer, who prepared the Standard & Poor’s analysis, said S&P; has loss estimates totaling $2.4 billion from 29 companies representing 62% of the California property insurance market, including earthquake, homeowners, auto and commercial coverage.

If the remaining 38% of the market suffered proportional losses, he said, “we’re looking at a total closer to $3.5 billion.”

That would far exceed the $2.5-billion estimate released Feb. 7 by the Property Claims Services division of the American Insurance Services Group, a trade group that polls insurers to compile official catastrophe loss estimates.

These estimates concern only losses that will be covered by insurance. The total losses are far higher because much of the damage was to uninsured public infrastructure such as sewers and highway overpasses and because individual earthquake policies have high deductibles and only about one-third of Los Angeles homeowners buy them.

The S&P; report said the bulk of earthquake claims will be paid by large, multistate carriers such as State Farm and Allstate, whose diversification and huge capital bases will make their losses “taxing but not devastating.”

On the other hand, the agency also listed a number of smaller insurers with what it called “high potential catastrophe exposure.”

The companies have such high concentrations of California property insurance business relative to their surplus--an insurer’s financial cushion against claims--that they are “susceptible to financial stress” from the quake and future disasters.

At the top of the list are two Santa Monica-based sister companies, Western Mutual Insurance Co. and Residence Mutual Insurance Co., which together wrote $40 million in California property insurance premiums in 1992, representing 435% of their combined surplus.

That was by far the highest premiums-to-surplus ratio among the 66 insurers that S&P; surveyed.

But mere exposure to potential losses does not necessarily translate into financial shakiness, Paul Rubincam, senior vice president of Western Mutual, said in a telephone interview Wednesday.

Rubincam said the two companies, which serve about 110,000 California policyholders, expect earthquake claims of $5 million to $6 million. However, the bulk of that will be covered by reinsurance--policies that insurers buy to protect themselves against such catastrophes.

The net cost to the two insurers is likely to be only about $1.5 million, or a bit less than one-fifth of their surplus, he said. It’s a painful blow but not life-threatening, Rubincam said.

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The company S&P; listed as having the next-highest catastrophe exposure is American Sterling Insurance Co. of El Toro, with a California premiums-to-surplus ratio of 183%.

American Sterling President Michael Thompson said the figure is misleading because the company writes virtually no earthquake insurance and expects only a single fire-related loss claim from the Northridge quake.

No other carrier had a ratio of more than 100%.

Regarding its projected $600 million in quake claims, Farmers said a “substantial” but undetermined portion will be covered by reinsurance. The exact amount will not be known until the end of the year because the company’s reinsurance level is based on a formula comparing the total annual revenue with its total annual losses.

Wednesday’s report puts Farmers in a tie with State Farm for the highest quake damage estimate. Next comes Allstate, with an estimated $350 million in claims.