Damage from Hurricane Sandy is far from fully tallied, but cost estimates are rolling in already. The bad news is that the range now sits around $10-$20 billion; the good news, however, is that property and casualty insurers will likely be responsible for only $5-$10 billion of that estimate.
Northeastern insurers will be hit, but not mortally
Property and casualty insurers in the Northeast will be the hardest hit. Allstate (NYSE:ALL), the second-largest insurer with nearly 11% of the market share, had adjusters in place early, as did Travelers (NYSE:TRV) and Chubb (NYSE:CB). Hartford Financial (NYSE:HIG), based in Connecticut, along with Erie Indemnity and Tower Group, are also within the top 10 insurers in the parts of the country where Sandy is making its presence felt.
While $5-$10 billion isn't chump change, the numbers could be much worse. A couple of factors are in the insurers' favor, one of which is the nature of Sandy: A coastal event with storm surges, and therefore lots of flooding, an issue which falls not in P&C insurers' laps, but that of the National Flood Insurance Program.
Another reason insurers will suffer less of a financial strain with Sandy is because they have padded their balance sheets with higher premiums and deductibles. Companies have also rejiggered underwriting rules and have stopped offering policies in areas that are especially prone to hurricanes.
Who will weather Sandy the best?
Since 2012 has thus far been relatively quiet, Sandy will likely be the biggest catastrophe with which the industry will have to contend this year. Even so, insurers seem hardy enough to take what Sandy can dish out; as analysts at Morgan Stanley point out, a cushion of $500 billion or so should certainly help.
Though all the insurers are pluckier this year than they were in 2011, when they had to contend with the detritus of Hurricane Irene on top of other disasters, some have taken additional steps to bolster their balance sheets. Hartford, for instance, has inked a deal to sell its Retirement Plans arm to Massachusetts Mutual Life Insurance for $400 million. Travelers has boosted premiums for its residential and business insurance departments, and Chubb has raised rates as well, while recently boosting guidance on operating income for this year by approximately $1.00 per share. Within the past year, Allstate has dissolved its banking operations, freeing the company from increased regulatory scrutiny.
One Fool's take
Though a definite high-profile event in what was previously a rather boring year for insurers, Sandy will probably not cause P&C insurers to break a sweat. Fatter cash reserve cushions -- and the fact that much damage will come from flooding -- should help buffer the effects of the hurricane, whatever the costs wind up to be. For P&C insurers and investors, Sandy will probably be the year's most memorable storm, but it likely won't be a disaster for the industry.
Fool contributor Amanda Alix has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.