Hurricane Irene may heap billions of dollars of extra costs on the already fragile U.S. economy, but insurance companies are likely to emerge relatively unscathed.
Most of Irene’s damage was from flooding, which the government insures, instead of wind, which insurance companies cover, meaning insurers could pay out as little as $1.5 billion by some early estimates.
That’s just a fraction of the $10 billion to $12 billion of economic damage that Irene likely caused, according to estimates from catastrophe modelers and ratings agencies. Moody’s Analytics said the storm might take a tenth of a percentage point off third-quarter gross domestic product.
The question now for insurers is whether the insured losses are bad enough to eat up third-quarter earnings, which some analysts believe is the case, and whether the losses are enough to let insurers raise rates, which many analysts doubt.
“Obviously we’re still early in a process. For the third quarter we build pretty substantial catastrophe loads into our estimates. While there’s a wide range we feel like we’ve got some conservatism built into our numbers,” said Larry Greenberg, an analyst at Janney Capital Markets unit Langen McAlenney who covers insurers.
Insurers have already suffered big blows from other disasters this year, and their disaster losses for the first half of 2011 are well above total levels for 2010.
But figuring out how Irene will affect earnings is difficult because modeling hurricane losses is so tricky, on top of the usual challenge of forecasting insurance earnings.
For example, Dow industrials component Travelers Companies Inc has reported results that are at least 20 cents different from Wall Street’s estimates for four quarters running, sometimes to the upside and sometimes to the downside.
What is clear, though, is that insurance stocks are rallying after Irene. Last week, as the storm approached and worst-case scenarios were bandied about, the insurance sector underperformed the broader market by half. This week, with the relief of a more moderate hit from Irene, insurers are at least a third better than the market in general.
“At the end of the day, last week the underperformance was the result of fear that Irene could be the storm that CNN and Weather Channel were talking about, a worst-case scenario for New York and the northeast,” said Matthew Carletti, an analyst at JMP Securities. “The fact is, the storm weakened. You still had damage, but it was pretty modest.”
Carletti said it appeared investors had been more concerned about the downside pressure a major storm could cause on earnings than the upside pressure it would exert on insurance pricing across the sector.
BAD FOR THE ECONOMY
By many standards, Irene could have been much worse. The economic damage it wreaked was just a fraction of the damage from Hurricane Katrina in 2005 or Andrew in 1992. Continue reading →