Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

How Hurricane Irene Could Affect Insurance Stocks

By

Allstate, Travelers, and Aspen are some of the companies that will be in the eye of the storm and have potentially the greatest exposure.

PrintPRINT
Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

As Hurricane Irene barrels toward the East Coast, there is a lot of discussion about what the impact will be on insurance stocks. There are some names that will be in the eye of the storm and have potentially the greatest exposure. In the property and casualty (P&C) sector, these include: Allstate (ALL), Travelers (TRV) and Chubb (CB) with, in descending order, an estimated $800 million, $600 million and $400 million for a $1.8 billion of the estimated $4 billion insurance cost. In the reinsurance (RE) sector, names include Arch Capital (ACGL) Aspen (AHL) and Transatlantic (TRH), all with about $300 million in estimated exposure. The economic cost is estimated at around $13 billion, which will place as the second (albeit distant) costliest storm in U.S. history.

No Hard Market on Horizon

When this storm first started to brew I thought I saw a silver lining, in that this would be what pushes the industry into a "hard" market -- that is, provides insurers the ability to increase premiums sufficiently across the board to more than offset current losses. But that doesn't appear to be happening. Instead we're seeing the usual counterintuitive thinking. Remember Goldman Sachs (GS) issued a big bullish report on P&C and RE in the wake of the Japanese earthquake which sent shares of companies such as XL Capital (XL) into a sharp rally in mid March. The reasoning behind the recommendation was that at that point, losses from the second half 2010 events such as earthquakes, flooding, and drought in Chile, Australia and Russia, would push yearly insured losses well beyond the $50 billion typically needed to create a hard market.

But the hard market never came and the share prices for companies in the sector went into a down trend. I see today we are starting a bit of an oversold bounce and a discussion of a hardening market. Don't buy it. It ain't coming. The last true hard market was following 9/11 and that lasted all of two years. Then Hurricane Katrina provided a shorter and more sector-specific hardening. Like most things in this world, cycles have become quicker and more localized.

ZIRP Hurts Both Ways

And of course, like so many other things, we can blame Ben Bernanke for the headwinds facing the insurance industry. The main problem facing the insurance business is that the near-zero interest rate environment (ZIRP) has hurt on two fronts. It has made money cheap which has spurred competition as firms have feasted on easy money and a relatively benign prior three years of events. Earnings over the past few years have been boosted as firms have been able to release reserves (money previously set aside for losses) that boosted the bottom line. But top-line revenues have only grown at the 2%-4% range. And unlike the early '90s (or even mid '80s) there have been no notable bankruptcies leading to consolidation. There is just too much money available to write insurance as people look for yield.

On the other side is the fact that insurers make the bulk of their money on generating income from investing their capital or money collected in the form of premiums into mostly the bond market. With interests rates at historic lows and supposedly set to stay that way for another two years, those returns are way below expectations. This means that after another hit such as Irene, the companies will need to apply some of the reserves they have built up; but they have dismal prospects of building them back up over the next few years.

So while the stocks mentioned above may seem pretty beaten down and are enjoying a bounce today, I would not rush into buying them as the upside seems limited over the next six to 12 months. Longer term, they do represent good value as most are trading near book. But as we know, right now, cash is far from king.

For more from Steve Smith, take a FREE 14-day trial to OptionSmith and get his specific options trades emailed to you along with exclusive access to his full portfolio. Learn more.

< Previous
  • 1
Next >
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE