5 Insurance Stocks That Sandy Didn't Blow Away

NEW YORK ( TheStreet) -- Property and casualty insurance stock investors need to focus on the industry's improving fundamentals, heading into a weak fourth-quarter earnings season.

Prior to Sandy's catastrophic arrival, Insurance Information Institute president and economist Robert Hartwig said that insured catastrophe losses were "down somewhere in the order of 50%" from the previous year. Factoring in an estimated $25 billion in insured losses from Sandy, Hartwig now estimates that insured losses during 2012 in the United States totaled $57.9 billion, increasing from $35.9 billion in 2011.

The 2012 loss estimate is "far above the 2000 to 2011 average loss of $27 billion (in 2012 Dollars), according to the Insurance Information Institute.

Despite the "year-end surprise" from Sandy, Hartwig estimated that the combined property and casualty insurers had a combined ratio of 100.0% for 2012, improving from 106.4% in 2011. The combined ratio is the sum of incurred losses and expenses divided by earned premiums. It measures underwriting profitability, and a combined ratio of over 100% indicates an underwriting loss. An improved combined ratio for 2012, despite having such an unusual hurricane hit the Northeast, is a good sign for improved underwriting profit margins.

JPMorgan analyst Matthew Heimermann said in a report on Jan. 7 that "headline numbers should be anemic with a number of companies reporting operating losses," but that the loss numbers related to Sandy "may simply focus investors on underlying trends."

The positive trends for the industry, according to Heimermann, include "(1) rate increases that are higher than year-ago levels and at least as good as 3Q; (2) favorable reserve development as loss trends remain favorable in aggregate despite some normalization; and (3) improved underlying margins relative to a year ago and 3Q (adjusting for seasonality)."

"The one risk we see in 4Q is that we expect those companies that provide 2013 guidance to err on the cautious side," Heimermann said. "This does not reflect any change in the outlook, but similar to the start of 2012, managements may choose to assume "normal" loss trend in contrast to the still favorable trend the industry experienced in 2012 (at least for commercial lines)."

The following are brief earnings previews for five major property and casualty insurers, ranked by descending forward price-to-earnings ratio:

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