Hurricane Sandy has the potential to cause some of the largest losses the global insurance industry has faced this year, but nothing that would strain insurers financially aside from hurting earnings this quarter, analysts said on Monday.
Disaster modeling company Eqecat, used by the industry to forecast storm exposure, said Monday there was no way to assess what kind of losses Sandy might ultimately cause until after landfall sometime early Tuesday.
But because disaster losses in general have been much smaller this year than last year, financial analysts said insurers were well placed to handle the inevitable claims, even if they exceed last year's $4.3 billion in losses from Hurricane Irene.
"With $500 billion-plus of capital ... we expect the (property and casualty) industry is once again well prepared to pay all Frankenstorm insured losses," Morgan Stanley analyst Gregory Locraft said in a report on Monday, using the nickname for the Sandy-nor'easter combo.
While 2011 set global records for disaster losses of about $100 billion, mostly due to U.S. tornadoes and Asia-Pacific earthquakes, losses this year are a small fraction of that. Reinsurer Munich Re estimated this summer that worldwide disaster losses were just $12 billion in the first half of 2012.
That meant even a $10 billion hit from Sandy could end up being the most sizeable loss for the industry this year.
But with capital abundant, Locraft and others said the biggest impact on the industry may be in fourth-quarter earnings. Insurers budget for a much smaller volume of catastrophe losses in the fourth quarter than in the third period, which is the more typical window for hurricane damage.
Locraft said losses of about $5 billion would hurt earnings for large property insurers like Chubb Corp, Allstate Corp and Travelers Cos Inc, while losses around $10 billion would also affect the large global reinsurers.
EUROPE UNDER PRESSURE
"The causes for loss from this storm are likely to be a relatively broad area of tropical storm-force to some hurricane-force winds, as well as flooding," said Michael Kistler, a product manager at RMS, another of the modeling companies relied on by insurers.
"In Hurricane Irene, while we expected the storm to maintain strength, it actually weakened significantly ... whereas Hurricane Sandy by all respects has had the perfect timing of everything lining up."
Major European players like Lloyd's of London and Swiss Re said it was far too early to comment on loss impacts they may face, though investors sold shares on the mere prospect of Sandy's impact.
The STOXX 600 European insurance sector was one of the worst-performing equity indexes in Europe Monday on exposure fears, shedding 1.5 percent.
"I think it's fairly natural that the market's fretting a wee bit in terms of potential exposure," said Shore Capital analyst Eamonn Flanagan.
Nonetheless, Maryland-based analyst Meyer Shields of Stifel Nicolaus said in a note late Sunday that Sandy could cost more than Irene because of stronger winds, but was still manageable.
"Since we're located squarely in Sandy's expected path, we understand the inconvenience, frustration and in many cases, financial burden Sandy will impose on many Northeastern residents, but after an uncharacteristically catastrophe-light (third quarter), we think the industry can easily absorb $5 billion in insured losses from Sandy," Shields said.
LITTLE BOOST TO PRICING
Sandy's impact will inevitably lead to questions about the effect on insurance pricing, which has been rising for the last year or so.
Insurers suffered years of price weakness amid a relatively mild disaster climate, with rates in late 2010 and early 2011 dropping to levels last seen around the year 2000.
The catastrophes of 2011 changed that, and big insurers like Travelers have been steadily boosting prices in the high-single-digit percentage range each quarter since.
But Shields said it was unlikely Sandy would have enough impact to accelerate price increases for the sector. For a single event, analysts and insurers usually talk about a $50 billion loss as the kind of hit that would instantly raise pricing across the board.
Peers agreed that Sandy was unlikely to add any impetus to price gains, though it would not hurt, at a minimum.
"We do not expect a meaningful impact on commercial and reinsurance pricing levels, but the psychology of another large, unusual storm certainly should not hurt the pricing tone on the margin. An already very firm homeowners marketplace will only get firmer," said Larry Greenberg, an analyst at Janney Capital Markets unit Langen McAlenney.
(Reporting by Ben Berkowitz in Boston; Additional reporting by Myles Neligan and Sudip Kar-Gupta in London; Editing by Jeffrey Benkoe)