Hurricane Ivan Buffets Insurance Stocks
Matthew Goldstein
09/10/04 - 10:57 AM EDT
With a third powerful hurricane moving north toward Florida, shares of property and casualty insurance stocks are starting to bend in the wind.
Forecasters say Hurricane Ivan, currently packing winds of 145 mph as it moves through the Caribbean, could be the most devastating storm of all, leading to an early evacuation of the Florida Keys. Investors are also evacuating.
Over the past two days, the S&P Property & Casualty Index has fallen nearly 2%, as the weather reports have grown increasingly ominous. Shares of some of the biggest insurers in the Sunshine State are bearing the brunt. Buffeted stocks include
Allstate(ALL - Cramer's Take - Stockpickr), the second-largest homeowner insurer in Florida, down 3% to $46.34;
Chubb(CB - Cramer's Take - Stockpickr), off 1% to $68.72; and
St. Paul Travelers(STA - Cramer's Take - Stockpickr), down 1.3% to $33.70.
The losses aren't huge, reflecting a Wall Street debate about whether catastrophes are ultimately good for insurance companies, which can use them to raise premiums. Moderate selling shows the argument is turning in bears' favor, as investors fear a third big hurricane may be too much for the industry to absorb without pressuring third- and possibly fourth-quarter earnings.
The most recent forecast has Ivan scheduled to slam into Jamaica sometime late Friday or early Saturday before heading toward Cuba. If the hurricane stays on its current path, it could reach southern Florida Monday or Tuesday.
Insurance stocks weathered the first two big storms, Hurricanes Charley and Frances, in fine fashion, despite the estimated $14 billion in damages. Some stocks actually rose because the industry is in far better shape to pay off claims following three years of collecting higher premiums from customers. Even with Thursday's selloff, the S&P insurance index is up 4% since Aug. 13, the day Charley made landfall in Florida.
Insurers with big losses also can dip into a $15 billion hurricane fund set up by the state of Florida to lessen some of their burden. The Florida Hurricane Catastrophe Fund, established by the state in the wake of the $20 billion in devastation wrought by Hurricane Andrew in 1992, supplies supplemental insurance for primary insurers.
But investors are now concerned that a third hurricane, especially one with the potential to cause more damage than Charley and Frances combined, could be too much to absorb. Steep payouts not only will further erode earnings, they could also impact some company's credit ratings.
For Ivan to deal that big of a blow to the insurance industry, analysts say it probably would have to rival Andrew in terms of property damage.
"The Florida fund has eased the blow from the first two," says Bill Yankus, an analyst with Fox-Pitt Kelton. "A $20 billion-plus storm would start getting you into a level of concern."
Yankus says he's more concerned about the impact of rising interest rates on the profit margins of insurers than the mounting storm damage.
Given the unpredictability of hurricanes, it's too soon to predict whether Ivan will be the kind of "super catastrophe" risk managers fear. While Frances did serious harm to the Florida coast, killed dozens of people and threw tens of thousands of lives into disarray, the overall damage it caused, roughly $5 billion, is about half what was feared.
Bond rating agencies also say it's too soon to jump to any conclusions about the impact of Ivan on company credit ratings. Moody's Investors Services says the insurance industry is "much better prepared for catastrophic events today than it was when Hurricane Andrew struck." In a report issued earlier this week, Moody's says while it expects many insurers to "experience substantial near-term earnings disruptions," it doesn't foresee lowering any corporate ratings.
Ivan could still be a good thing for the property and casualty industry over the long term because it may provide the impetus for future premium hikes. Most analysts say the industry, even after Charley and Frances, has little room to raise insurance rates because of all the price hikes over the past three years.
But even if the industry's pricing power remains weak after Ivan's departure, some stocks may look cheap given the current selloff.
Jay Gelb, an insurance analyst with Prudential Equity Group, says it's not uncommon for insurance stocks to fall before a hurricane and quickly rise after the storm has passed. Gelb, in a research note, says the poststorm rally comes from the "perception that insurers should be able to raise prices going forward.''
For shrewd investors, then, further selling in the insurance sector could represent a buying opportunity, especially if Ivan turns out to be another Frances.
