Hurricane Sandy was downgraded by the National Weather Service to a tropical storm before it hit the east coast of the U.S. 7 days ago (October 29, 2012). Regardless, the storm played havoc and caused widespread damage which left 40,000 New Yorkers temporarily homeless and 110 dead. One obvious benefit of the downgrade for the homeowners hit by the storm is fewer insurance deductibles. In other words, lack of insurance deductibles means insurers would have to pay more. According to new estimates by a forecasting firm Eqecat, the Sandy storm could be the second most expensive storm in the U.S. history, after Hurricane Katrina. Sandy is estimated to have caused damages between $30 billion and $50 billion, while insurance cost to insurers is expected to be between $10 billion and $20 billion. That is why an analyst of Morgan Stanley wrote, while addressing investors in a report, that the U.S. property-casualty sector could see its bottom line drop by 26%. However, we believe that the effect would not be permanent. Insurance stocks have seen the initial dip and a further sell off will provide an ideal entry point for investors.
We believe that Travelers (TRV) and Chubb (CB) are amongst those insurance giants that would take the maximum hit. These companies stand to be the biggest property and casualty insurers in a densely populated region (New York) in terms of property, while Allstate (ALL) will also feel the effects of the storm.
The Travelers Companies is one of the oldest insurance organizations, with a large geographical exposure in the regions hit by the Sandy storm. The geographic distribution of direct written premiums in the New York region is around 10%, followed by Pennsylvania at 5%, and New Jersey at 4%. Shares of the company have fallen around 3.5% since the first news on the formation of the Sandy storm. Reinsurance deductibles for the company are below that of ALL and CB, which is why we expect lesser reinsurance expenditure for the company.
According to analysts at Credit Suisse (CS), Allstate could lose up to 90% of its fourth quarter earnings due to the storm. The company that stands to be the second largest personal property and casualty insurer in the U.S. has around 6% exposure in the New York region, as far as premiums and annuities are concerned. The stock fell around 5% since the news on the storm broke out.
Chubb has the largest exposure in the affected regions. New York accounts for 12%, while New Jersey accounts for 4% of the total direct premiums written by the company for the region. That is why analysts at Credit Suisse believe that the company's entire fourth quarter earnings could be hurt by the storm. Shares of the company fell by over 6% since October 26, 2012 (when the formation of Sandy was announced).
We also believe that American International Group (AIG) and Hartford Financial Services Group (HIG) will be able to manage their losses as both the companies have a diversified business base in both P&C and life insurance.
In conclusion, we believe the insurance companies under consideration have sufficient capital to sustain the losses from the storm. We also believe that the effects of the Sandy storm have already been priced in, to some extent, for Allstate and Travelers.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.