By Ben Berkowitz
NEW YORK (Reuters) - Hurricane Irene may heap billions of dollars of extra costs on the already fragile U.S. economy, but insurance companies are likely to emerge relatively unscathed.
Most of Irene's damage was from flooding, which the government insures, instead of wind, which insurance companies cover, meaning insurers could pay out as little as $1.5 billion by some early estimates.
That's just a fraction of the $10 billion to $12 billion of economic damage that Irene likely caused, according to estimates from catastrophe modelers and ratings agencies. Moody's Analytics said the storm might take a tenth of a percentage point off third-quarter gross domestic product.
The question now for insurers is whether the insured losses are bad enough to eat up third-quarter earnings, which some analysts believe is the case, and whether the losses are enough to let insurers raise rates, which many analysts doubt.
"Obviously we're still early in a process. For the third quarter we build pretty substantial catastrophe loads into our estimates. While there's a wide range we feel like we've got some conservatism built into our numbers," said Larry Greenberg, an analyst at Janney Capital Markets unit Langen McAlenney who covers insurers.
Insurers have already suffered big blows from other disasters this year, and their disaster losses for the first half of 2011 are well above total levels for 2010.
But figuring out how Irene will affect earnings is difficult because modeling hurricane losses is so tricky, on top of the usual challenge of forecasting insurance earnings.
For example, Dow industrials component Travelers Companies Inc <TRV.N> has reported results that are at least 20 cents different from Wall Street's estimates for four quarters running, sometimes to the upside and sometimes to the downside.
What is clear, though, is that insurance stocks are rallying after Irene. Last week, as the storm approached and worst-case scenarios were bandied about, the insurance sector underperformed the broader market by half. This week, with the relief of a more moderate hit from Irene, insurers are at least a third better than the market in general.
"At the end of the day, last week the underperformance was the result of fear that Irene could be the storm that CNN and Weather Channel were talking about, a worst-case scenario for New York and the northeast," said Matthew Carletti, an analyst at JMP Securities. "The fact is, the storm weakened. You still had damage, but it was pretty modest."
Carletti said it appeared investors had been more concerned about the downside pressure a major storm could cause on earnings than the upside pressure it would exert on insurance pricing across the sector.
BAD FOR THE ECONOMY
By many standards, Irene could have been much worse. The economic damage it wreaked was just a fraction of the damage from Hurricane Katrina in 2005 or Andrew in 1992.
But the U.S. economy is fragile now, and the hurricane hardly helps. U.S. gross domestic product grew at an annualized rate of just one percentage point in the second quarter, so shaving a tenth of a percentage point off could be material.
Analysts also warned of potential inflation from what is known as "demand surge," where people try to make repairs in short order and drive up many local prices.
For insurers, the losses could be somewhere between $1.5 billion to $2.8 billion, catastrophe modeling agency Eqecat said early Wednesday.
That is far less than the estimate from competitor AIR Worldwide, which suggested losses would range from $3 billion to $6 billion.
While it is not unusual for the two to differ in their estimates, the trend is clearly toward Irene costing the insurance industry much less than had been feared. In the days before Irene made landfall, many were predicting a $10 billion event or worse.
If AIR Worldwide is correct, Irene would rank as one of the 10 costliest hurricanes in U.S. history by level of insured losses. However, the lower end of Eqecat's estimate would put Irene well out of that range.
That said, it is still a blow to insurers, given estimates that they suffered $27 billion in catastrophe losses in the first six months of the year -- nearly 50 percent more than they lost in all of 2010.
"NOT A SOLVENCY EVENT"
For the last three years, when losses were less than they have been lately, insurance prices have been mostly falling, given excess capacity and heavy competition.
There have been enough natural disasters this year to eat up some of that extra capacity, such that insurance brokerage Marsh said this month price declines have stopped. But going into Irene, most analysts thought it would need to be a $15 billion event to "harden" the market, or pressure enough insurers to spur widespread price increases.
"People do get nervous about earnings and estimates cuts and instinctively tend to sell while the news is out there. The consideration of what it does to pricing happens a couple of weeks or more down the road," Langen McAlenney'S Greenberg said.
Given the relatively limited losses, ratings agency A.M. Best said the industry should have no problem absorbing the costs. While analysts have said losses could wipe out third-quarter earnings, it appears that will be the extent of the damage, leaving insurers' balance sheets intact.
"Despite the considerable catastrophe losses recorded through the first half of 2011, the overall (property insurance) industry remains adequately capitalized," Best said in a report. "Accordingly, Hurricane Irene is not a solvency event from an industrywide perspective."
Fitch Ratings also said on Wednesday that losses would be "material but manageable" for insurers and that no ratings actions were expected.
By market share, the largest insurers in the storm-hit states of New York, New Jersey and North Carolina include State Farm, Allstate Corp <ALL.N>, Liberty Mutual and Chubb Corp <CB.N>, according to A.M. Best.
"I think it's difficult going into it and it's difficult coming out of it," said Tom Lewandowski, an analyst at Edward Jones. "It's more important to take a longer-term outlook because (insurance) profitability doesn't really exist on a quarter-by-quarter basis."
(Reporting by Ben Berkowitz. Additional reporting by Lucia Mutikani in Washington)