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Hurricane Isaac Net Positive for Insurers

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The storm could actually prove profitable for the property and casualty (P&C) insurance sector.

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MINYANVILLE ORIGINAL As Hurricane Isaac diminishes to merely storm status and floats north past New Orleans, it's time to assess the impact on insurance stocks. Thankfully, the damage seems to be relatively small compared to last year's Irene, which battered the east coast. The damage from Isaac is merely a drop in bucket when compared to the devastation Katrina caused seven years ago.

Some of the numbers associated with these natural disasters: Isaac looks like it will have caused some $2 billion in insurable claims, compared to the record-setting $42 billion caused by Katrina and $5 billion caused by Irene. The economic cost for these two previous events, which includes government and uninsured expenditures, was significantly higher.

Firms with the biggest exposure include Allstate (ALL), Travelers (TRV) and Chubb (CB) with, in descending order, an estimated $350 million, $270 million, and $220 million insurance costs. In the reinsurance sector, names include Arch Capital (ACGL), Aspen (AHL), and XL Capital (XL). These companies have a combined total of less that $500 million in estimated exposure. So believe it or not, as crass is may seem to say, this storm could actually prove profitable for the property and casualty (P&C) insurance sector.

A Hardening Market on the Horizon

The silver lining for insurance firms is that this storm was a near miss, but also serves as a reminder of the need to buy catastrophic insurance. This will help bolster pricing, which has been soft over the past few years. If Isaac had lingered another day over the center of the warm waters in the Gulf of Mexico, it could have easily ratcheted up to a category 3 or 4 hurricane. With recent storms still a fresh memory, insurers should be able to push up prices and homeowners will be more willing to accept the higher premiums.

It was interesting to note that even in the wake of Katrina, premiums did not increase very much. Part of the problem was too many dollars searching for yield, which made underwriters willing to take risk.

And of course, like so many other things, we can blame Ben Bernanke for the headwinds facing the insurance industry. The main problem is that the near-zero interest rate environment (ZIRP) has hurt the economy in two ways. 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 a rate of 2% - 4%. 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.

Additionally, insurers have made 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.

But with Isaac being relatively benign, more reserves should be able to be released and P&C firms should start to enjoy pricing power. The aforementioned stocks represent good value as most are trading near book value and present a buying opportunity.

Twitter: @steve13smith

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No positions in stocks mentioned.

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