It feels somehow callous to be tallying Irene’s economic costs and potential effects on financial markets so soon after the storm passed us by.
So before proceeding, we’ll note that those of us in New York City would do well to remember that despite the mildness of what we experienced, the storm has taken quite a toll elsewhere in the US — killing at least 20 people, knocking out power in millions of homes and flooding large parts of the East Coast. The FT and WSJ have more.
A few points we wanted to highlight…
1) Although the damage is less than what was feared, we still don’t know the full scale of it. Eqecat, which supplies insurers and re-insurers with catastrophe risk models, posted a report on Monday morning:
Hurricane force winds were observed along the New Jersey and New York coasts, affecting the dwellings of millions of people. The rainfall from Irene may become the most damaging component of the event; the Connecticut River in Massachusetts and Connecticut is above stage, as are many rivers in New Jersey, including the Millstone, Passaic, Ramapo, and Hackensack rivers. River crests will occur through the next 36 hours as the water flows downstream.
Nomura adds detail in a note of its own:
With Irene adding 6 to 10 inches (and much more in some areas) to what had already been an unusually damp August, the storm has made the past month for several communities (e.g., Philadelphia, New York City) the wettest month ever. As a result, heavy flooding rivers and streams has disrupted activity, stranded entire communities and wrought extensive flood damage on thousands (if not millions) of homes. Oddly enough, some of the worst damage from the hurricane is in upstate the more mountainous regions of Pennsylvania, New York, and New England where mountain water run-off has inundated the valley towns.
Eqecat is still in the process of compiling its report for the mid-Atlantic region and US as a whole, and the report should be out by tonight, according to a spokesman.
2) Cat bonds are likely to soon recover from last week’s losses. Artemis blog writes that these bonds declined severely last week in anticipation of the storm but should soon rebound. Here’s a chart of the US Total Catastrophe Bond Performance Index, which last priced on Friday at its lowest point of the year:
3) Insured losses will be lower as a percentage of total losses than for previous hurricanes. In addition to the storm’s damages costing less overall, this is one of the reasons those Cat bonds should bounce back. The following estimates are from a note by Kinetic Analysis Corporation, which significantly reduced its forecasted losses from more than $20bn on Friday to a range of $6-10bn now.
The report includes an interesting footnote explaining why insured losses will be a smaller share of the overall (our emphasis):
First, the diffused nature of the storm resulted in minimal direct wind damage other than from blown down trees. A lot of the structure damage from Irene will likely be due to rising water from rain induced or coastal flooding – those losses are not covered by private insurance, but by the FEMA Flood Insurance Program (if folks were smart enough to get it!). Second, and critically for insurers and the reinsurance community, deductibles have been rising for coastal exposures over the last decade. Many policies in coastal areas now have a percent deductible rather than a fixed deductible, normally in the 2% range. For example, a 200,000 house with a 2% deductible, the owner will have to cover $4000 before insurance starts to pick up the loss, whereas 10 or 15 years ago the homeowner might have had a $500 fixed deductible. Third, even though Irene hit on the weekend, a lot of expenses from this storm will be due to disruption and evacuation, and many of those expenses are not covered in the absence of damage or business interruption insurance. We feel the power outages will not last more than a couple days in most areas, but that is another factor as to economic impact for next week.
Requisite caveat before moving on: These are early estimates, and given the aforementioned uncertainties it’s quite possible that actual costs will turn out to show something different. It’s also worth noting that the Kinetic estimate seems to be on the lower end of the spectrum. See this ABC News report for other, higher estimates.
4) The effect on measured national economic activity will probably be small. That doesn’t mean there won’t be significant disruptions, especially to some local economies, but they are likely to be transitory (on a national scale) and their net effect uncertain.
More from Nomura:
Irene brought damage either as a hurricane or tropical storm to large parts of the most populous regions of the US. We estimate that the residents of the states hit in some way or another by the storm account for more than 36% of personal income (and likely, spending as well). Weekly retail sales data may well provide the most visible effects of the storm. Preparations ahead of the storm appear to have led to unusually strong sales of packaged food, water, and building supplies but probably cut into seasonal back-to-school sales. (In the GDP accounting of things, the building material sales should be, in principle, divided between business and consumer sales.) Some of these sales will have been at the expense of sales later. (For instance, battery sales are likely to be well below “normal” for many weeks ahead.) We suspect these effects on retailing activity, however, will prove to be mainly intertemporal shifts in timing with little or no net impact on spending within the current quarter.
5) And asset prices won’t be much affected either. S&P Equity Research sent over a chart showing the stock market performance that followed the ten most expensive hurricanes, some of which overlap:
S&P ER’s conclusion is that equity prices generally will be driven by events that affect the national economy more broadly. Sounds about right. That said…
6) Insurers and reinsurers are breathing a bit easier today. The S&P 500 is up roughly 2.3 per cent at pixel time, but the KBW Insurance ETF is up 5.3 per cent.
Related links:
US authorities assess hurricane aftermath – FT
Hurricane Irene approaches New York – FT Alphaville