Sandy's Impact on Insurance Companies Less Than Feared
Property and casualty firms should have the capacity to pay out the estimated claims from Sandy; we're leaving our fair value estimates unchanged.
With Hurricane Sandy making landfall and the worst of the storm seeming to have passed, it appears that the impact on insurance companies will be less than feared. Initial tallies from risk modelers such as Eqecat place the estimate for insured losses due to Sandy at somewhere between $5 billion and $10 billion. This figure is less than half of the estimate for total losses, which currently stands at around $20 billion, since most of the losses will be caused by flooding. Flood insurance is not covered under standard private insurance contracts but rather is administered by the U.S. government under the National Flood Insurance Program. These estimates are still preliminary and will undoubtedly be revised as the situation develops and claims begin to flow in, but based on current information, we do not expect to make changes to the fair value estimates for any of the insurers we cover in light of the storm.
While the losses will be material for many of the property and casualty companies we cover, the current year has been relatively benign for losses, and as a consequence, the industry has significant capacity to pay claims. Insurance is a volatile business, and paying claims for occasionally large losses is part of the natural course of business for these companies. Additionally, to the extent that the storm reduces capital from the industry, it could help harbor a more broad increase in prices. In the most recent quarters, many insurers have been noting mid- to upper-single-digit price increases, which may be indicative of the beginning of an improving pricing market. A large loss event may help drive a change in industry behavior, which could usher in a more widespread hardening market.
Drew Woodbury does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.