Is the battered insurance industry ready for the storm season?

Insurance specialists tend to be a gloomy lot. After all, their work demands they think of the worst-case scenario every time. But when these professional pessimists start talking about the hurricane season that kicks off Monday, even they get a little rattled. The prospect of another year like 2005, which saw Katrina, Rita, and Wilma pummel the southeastern United States, could prove exorbitant for insurers and taxpayers alike.

But ironically, the property/casualty sector of the insurance industry is in much better fiscal shape than its life-insurance counterpart. While insurers like AIG (AIG) lost a bundle in 2008 due to their investments in mortgage-backed derivatives, companies who offer things like homeowner's insurance didn't dabble as much in these riskier options.

The reason for this disparity has to do with the payout schedule of each type of insurance. Life insurance companies prefer long-term investments with (theoretically) better returns, because they anticipate the need to service a policy or annuity for up to four decades into the future. Property insurers, however, know a tree can fall on your roof anytime. So they traffic in shorter-term investments, mostly in the fixed-income sector, which turned out to be better insulated during the market's fall of ‘08.

This doesn't mean Property & Casualty insurers didn't suffer any losses. According to the Insurance Information Institute, these companies had 18 percent of their collective capital invested in the stock market, including some investments like mortgage securities and Lehman Bros. debt. But while the life-insurance arms of some of the nation's largest insurers  have received federal TARP money, the P/C divisions are merely bruised. For them, 2008 was more of a fall from a tree house than a high-rise.

Analysts' biggest worry is that something even larger than Katrina will come careening through the Gulf this summer. Big hurricanes have been getting costlier. A direct, Category 5 hit on an urban center like Houston could cost $100 billion. By comparison, Katrina damages rang in at around half that, and Andrew, which blasted south Florida in 1992, cost a relatively comparatively paltry $21 billion in 2005 dollars.

Could the industry afford such a mega-storm? Technically, yes. P/C companies were sitting on $456 billion at the end of 2008. So, with the possible exception of some smaller firms, they wouldn't implode if the Big One hit. The problem is what happens next.