(Image credit: Getty Images via @daylife)
Estimates of the financial toll of Hurricane Sandy are already in the tens of billions of dollars and likely to rise further. Insurers and reinsurers are expected to have exposure to about half the total, but for investors any storm-related pullback over the next few weeks will mark a buying opportunity.
Catastrophe modeling firm EQECAT is estimating insured losses could top $20 billion at this point (others have the figure closer to $10 billion), but analysts say those figures have a tendency to climb. While the impact will be felt by insurers, there is reason to believe that the earnings impact will be limited to just a single quarter, analysts say, or two at worst.
"Companies are hesitant to comment at this point, and rightfully so," says JMP Securities analyst Matt Carletti, but he does not expect the ultimate damage to have a long-term impact on the bottom line. Even for the companies with the largest anticipated exposure -- companies like Allstate, Travelers, the Hartford and Chubb -- Sandy-related payouts are likely to impact quarterly results. But they "won't wipe out earnings for the year," Carletti says.
(Insurance companies are likely to be on the hook for more than if Sandy had come ashore while still carrying hurricane status. Because it did not, it does not appear companies will be able to charge a hurricane deductible that is typically a percentage of the value of a property, rather than a flat amount.)
Bernstein Research analyst Josh Stirling agrees. The insurance group has had a good year and has plenty of capital, he says, "so even a large loss is manageable."
Importantly, it appears that much of the damage from Sandy was driven by the unprecedented storm surge that hit New York City, the Jersey shore and elsewhere. For homeowners and many small businesses, flood insurance is paid out by the federal government (FEMA), not by the insurance companies. And compared with catastrophes like Hurricane Katrina, the wind-driven damage of Sandy appears to be less severe at this stage, and there is no question the bulk of the damage was caused by the storm surge, says Carletti.
One place Stirling thinks the industry could see some surprise is in the damage in lower Manhattan. When large companies take out flood insurance claims do not fall under the government's aegis, but on the private insurers. Some of those companies also buy business interruption insurance in addition to flood coverage as well.
Those contracts are more idiosyncratic than standard homeowner policies, Stirling says, so it will take time to get a fix on just how much exposure big players have. He warns against expecting a big hit, though he does expect there may be some upside risk to the ultimate losses. The reason is that when big insurance packages are put together they are often split amongst a few insurers, and quite frequently some of that risk is then laid off onto reinsurers.
This time around, Carletti estimates primary insurers will bear the brunt of the losses up to $10 billion, with reinsurers taking a disproportionate shares of the losses beyond that. Still, he does not expect it to be a capital event for those firms, which include the likes of General Re, owned by Warren Buffett's Berkshire Hathaway, Swiss Re.
The impact of Sandy on buildings, waterfront facilities and possibly some municipal assets along the East Coast means that some large-account insurers will be paying out for losses. "Of course, small commercial accounts in places like Cape May don't buy all-risk or flood coverage," Stirling wrote in a note Wednesday, "but the casinos in Atlantic City, major institutions and class 'A' building owners in lower Manhattan, and major industrial facilities at risk in Northern Jersey and Brooklyn in waterfront locations almost all do."
So while he does not expect the impact on insurers like American Intl Group, XL Group and ACE Limited to be extreme, it bears watching.
Carletti and Stirling agree that investors should be mindful of any pullbacks in the insurance stocks. To Stirling the opportunity is one of relative value. While Sandy was a major storm, the exposure for the companies catering to homeowners, or the likes of car insurer Progressive, will prove manageable and as some names are hit harder than others there may be chances to buy.
"Honestly, I thought [insurance stocks] would be weaker this week," Stirling says, with the market coming off a two-day shutdown which many spent watching nonstop storm coverage. "Investors over time have been trained to buy the insurance group on bad news," he says. "But more bad news on the margin will pressure the stocks."
The fact is, insurers are in much better shape to withstand the financial impact of Sandy than they would have been a year ago. From tornadoes that struck Missouri and Alabama to Hurricane Irene, 2011 was a painful year. This year, the major U.S. firms spent nine months rebuilding balance sheets and capital bases, leaving them in better shape to deal with Sandy, Carletti says.
Investors seem to share the view, as insurance stocks were mixed Thursday but few gained or lost much more than 1%. Allstate looked to be in the worst shape, down 1.9%, while the Hartford was at the other end of the ledger, up 1.3%.
Follow @SchaeferStreet on Twitter, or on Forbes at the top of this post. Subscribe to updates on Facebook.