What If the Real 'Big One' Hits the Northeast?

NEW YORK ( TheStreet) -- We've been quite lucky that no major hurricanes have hit the United States over the past seven years.

In the wake of the massive flood damage caused by the Category 1 Hurricane Sandy in late October and an excellent concert last Wednesday at Madison Square Garden to raise funds for victims' relief, that may seem like a strange statement, but "none of the twenty major hurricanes forming in the Atlantic basin in the past six years have impacted the U.S. coastline at major hurricane strength," according to the Tropical Meteorology Project.

A major hurricane is a storm of Category 3, 4 or 5, "which reaches a sustained low-level wind of at least 111 mph (96 knots or 50 ms-1) at some point in its lifetime," according to the Tropical Meteorology Project, which is led by William Gray, professor emeritus of atmospheric science at Colorado State University.

The Odds of a Big One


While the Project's quantitative hurricane forecast for 2013 will not be released until April 10, the group's Dec. 7 Extended Range Forecast of Atlantic Seasonal Hurricane Activity and Landfall Strike Probability for 2013 includes a "qualitative discussion" on various factors underlining a very busy period for hurricane activity, that is likely to continue.

According to the Dec. 7 report, the past seven years have been quite unusual, with no major hurricanes hitting the mainland, following a very difficult 2004 and 2005, "when seven of 13 major hurricanes made U.S. landfall," including the catastrophic Hurricane Katrina, which hit New Orleans in late August 2005. The Tropical Meteorology Project said that "The last 100-year climatology indicates that approximately 30% of all major hurricanes that form in the Atlantic basin make U.S. landfall as major hurricanes."

While the Dec. 7 report didn't contain specific number predictions, it did include probabilities for tropical storm and hurricane hits for 2013. The probability of a "named storm" hitting the East Coast, including Florida, is 81%, while the probability of Category 1 or 2 hurricane hitting is 44%, with a 31% probability of a major hurricane of Category 3, 4 or 5 making landfall, during 2013.

Of course, Florida factors heavily in the above figure, with a 51% probability of a hurricane making landfall and a 21% probability of a major hurricane hitting during 2013.

Breaking its probabilities down by state, the Tropical Meteorology Project said that the probability of a hurricane making landfall in New York during 2013 was 8%, with a 3% probability that a major hurricane would hit. For New Jersey, the probability of a hurricane hitting land is 1%, with a probability of less than 1% for a major hurricane. For Connecticut, the probability of a hurricane strike is 7%, with a 2% probability for a major hurricane hitting land.

Big Insurers Have Strong Reserves


It's too early to calculate the total amount of insured losses for U.S. property and casualty (P&C) insurance carriers this year, as claims for damage caused by Sandy are still being processed.

Insurance Information Institute president and economist Robert Hartwig says there's "an enormous range" of estimates ranging from $10 billion to $25 billion. "when you put them all together you come up with a figure of $18.8 billion, as sort of a midpoint at all the ranges, which would put Sandy in the number 3 spot for insured losses from hurricanes," behind Katrina and Andrew, which devastated southern Florida in August 1992.

Hartwig says that "the industry entered the 2012 hurricane season very strong financially and it finished the season very strong financially despite Hurricane Sandy and despite the fact that 2011 was the fifth most expensive year for insured catastrophic losses in the U.S., and the most expensive globally."

"Sandy is generally categorized as an earnings event and not a capital event," he says. "It does reduce fourth-quarter earnings, but the industry is no longer impaired by a lack of capital going forward."

When asked whether or not the large P&C carriers have sufficient reserves to survive a major hurricane strike in the Northeast, Hartwig doesn't mince words: "Absolutely. There are many scenarios for events larger than Sandy, in the $30 billion range, for a Category 3 or Category 4 storm. It is far more likely that something like that would hit the Long Island area," than it would be for a major hurricane to hit other areas, he says.

"There are models for a repeat of the 'Long Island Express' storm of 1938, also known as the 'Great New England Hurricane.' Such a storm could cause over $30 billion in loses according to various models, but this is exactly the type of event for which the industry plans.

Here's a quick look at underwriting results for the first three quarters for five publicly traded insurers with significant P&C market share in the Northeast, along with damage estimates from Hurricane Sandy, if available, and third-quarter capital levels:
  • Allstate (ALL) on Nov. 28 estimated that its losses for October, net of reinsurance, totaled $1.1 billion before taxes. The company said that "autos represent approximately 40% of the total gross losses, with 78% in New York, 19% in New Jersey and 3% in other states." For its Property-Liability unit, Allstate reported underwriting income of $1.316 billion for the first three quarters of 2012, improving from an underwriting loss of $1.483 billion, a year earlier. The company had $20.8 billion in total equity as of Sept. 30, increasing from.
  • The Travelers Companies (TRV) on Dec. 5 announced that its preliminary estimate of losses related to Sandy was $1.135 billion, net of reinsurance. The after-tax loss estimate was $650 million. For the first three quarters, Travelers reported an underwriting profit of $845 million, improving from an underwriting loss of $1.453 during the first three quarters of 2011. Travelers reported that as of Sept. 30, the company had total equity of $29.5 billion, increasing from $24.5 billion in Sept. 2011.
  • Berkshire Hathaway (BRK.B) has not yet announced an estimate of its losses from Hurricane Sandy. The company reported an underwriting profit of $1.065 billion for the first three quarters, increasing from $261 million a year earlier. The company had $189.1 billion in total equity as of Sept. 30, increasing from $170.1 billion a year earlier.
  • American International Group (AIG) on Dec. 7 announced a preliminary estimate of $2.0 billion in losses from Hurricane Sandy, net of reinsurance, or $1.3 billion after taxes. The company also said it expected to contribute $1 billion in capital to its AIG Property Casualty unit, after the unit had paid $2.4 billion in dividends to the holding company through the first three quarters of 2012. For the first three quarters of 2012, the company followed the industry trend for improved underwriting, but still showed an underwriting loss of $838 million for its Property Casualty Unit, narrowing from a loss of $2.494 billion a year earlier. AIG reported that as of Sept. 30, the P&C unit had $49.6 billion in capital and that the parent company had total equity of $102.4 billion.
  • Chubb Corp. (CB) on Dec. 11 announced estimated losses of $880 million before tax, or $570 million after tax, from Hurricane Sandy, net of reinsurance. The company had previously suspended its repurchases of common shares, but said it would resume buybacks following the loss announcement, although at a slower pace than originally planned. For the first three quarters of 2012, Chubb reported underwriting income of $880 million, increasing from $290 million during the first three quarters of 2011. The company had $16.0 billion in equity as of Sept. 30, increasing from $15.3 billion a year earlier.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

More from Stocks

Lowe's Taps Home Depot Veteran As New CEO

Lowe's Taps Home Depot Veteran As New CEO

Facebook CEO Mark Zuckerberg Deflects Tough Questions From European Parliament

Facebook CEO Mark Zuckerberg Deflects Tough Questions From European Parliament

WATCH: 4 Experts Lay Out How Wealthy Investors Should Play Today's Risky Market

WATCH: 4 Experts Lay Out How Wealthy Investors Should Play Today's Risky Market

These 5 Autonomous Driving Stocks Are Flashing Buy Signals

These 5 Autonomous Driving Stocks Are Flashing Buy Signals

Stocks Waver Amid Progress on U.S.-China Trade; Dow Slips

Stocks Waver Amid Progress on U.S.-China Trade; Dow Slips