A dip in sustained wind speed as Sandy came ashore doesn’t seem like it would be much comfort to those whose homes were lost or damaged, but it turns out it could be a blessing to disaster victims — and an enormously costly technicality for the insurance industry.
The fact Hurricane Sandy was not a hurricane after all, but rather a “post-tropical” storm, when it made landfall has insurers on the hook for billions in additional claims. The governors of New York, New Jersey and Connecticut are insisting that affected insurers recognize this meteorological classification, because deductibles for policyholders are much, much higher when a hurricane hits.
Insured losses currently are estimated at anywhere from $7 billion to $20 billion, according to various industry analyses, potentially wiping out an entire quarter’s worth of profits for some property & casualty insurers.
True, analysts have yet to change their ratings on any sector affected by the East Coast superstorm — but then, it still is early in the aftermath of the disaster.
“At this point, most analysts covering S&P 500 companies have not made any significant changes to their recommendations on companies in industries negatively impacted by Hurricane Sandy,” writes John Butters, FactSet senior earnings analyst, in a note to clients.
“It is likely that many analysts are still waiting for more information from the individual companies on the impact of the hurricane before making any changes to their longer-term outlooks on the companies in these industries.”
And downgrade pressure will surely mount if more analysts cut their earnings estimates and price targets. Credit Suisse (NYSE:CS) analysts lowered price targets on Allstate (NYSE:ALL), Arch Capital (NASDAQ:ACGL), Chubb (NYSE:CB) and Travelers (NYSE:TRV) on Thursday, citing the potential for $8 billion in insured losses stemming from the storm.
Certainly the market is discounting some pretty bad earnings news, as shares of insurance companies with heavy exposure to the Northeast and Mid-Atlantic have been hammered since their pre-storm peaks of Oct. 18.
Here’s a running tab of share-price declines through early trading as of Nov. 2:
- American International Group (NYSE:AIG): -9%
- Allstate: -8.4%
- Chubb: -7.2%
- Travelers: -5.5%
- XL Group (NYSE:XL): -5.3%
- ACE (NYSE:ACE): -4.4%
- Berkshire Hathaway (BRK.A, BRK.B): -2.9%
All is hardly lost for the P&C insurance industry, however. For one thing, flood insurance for homeowners and many small businesses is paid for by the Federal Emergency Management Agency (FEMA), meaning the federal government — not the insurance companies — are on the hook for those claims.
Furthermore, it’s been a very good year for insurance companies up until now, with no major disasters piling up claims. Indeed, Hurricane Irene of 2011, as well as last year’s Tropical Storm Lee, left the industry in much better shape for the 2012 hurricane season.
As a result of last year’s big losses, Travelers, for example, had to increase insurance rates for its business insurance clients, according to analysts at Trefis, hiking prices by more than 7% a quarter over the first three quarters of 2012.
At some point, the selloff in insurance stocks will be overdone and there will be bargains to be had. But we’re not there just quite yet. Estimated damages are rising even as the floodwaters recede — and it’s always tough to discount for headline risk.
If there is one clear takeaway in wake of Hurricane Sandy, though, it’s that when it comes to investing, diversification is the best insurance policy of all. While individual names have collapsed as much as 9%, the highly diversified insurance exchange-traded fund — SPDR S&P Insurance ETF (NYSE:KIE) — has slipped just a bit more than 2%.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.