Hurricane Isaac Is the Least of Insurers' Worries: Street Whispers

NEW YORK (TheStreet) -- Despite the hysterical media coverage of Hurricane Isaac, share prices for major property insurers have held up quite well over the past two weeks.

Shares of The Allstate Corp. (ALL) closed at $37.33 Wednesday, down 1% from two weeks earlier, while The Travelers Companies (TRV) saw its stock rise 2% over the same period, to close at $64.80 on Wednesday.

The reason that Isaac has had no effect on the insurers' share prices is that the damage estimates so far from hurricane top out at $1.5 billion. When you compare that with a hail storm that hit Dallas in June caused just as much property damage, this hurricane will not move the insurance share needle.

In fact, the nation's largest publicly traded property and casualty insurers are still reeling from a major bet on building their businesses in the Midwest, while shying away from coastal areas, lessening the impact of hurricanes on their balace sheets and doubling down on the impact of losses from tornados, hail storms and severe thunderstorms.

As the insurers began to reduce their underwriting in coastal areas in the wake of Hurricanes Frances and Jeanne in 2004 -- and especially the catastrophic Hurricane Katrina in 2005 -- they began focusing on building their property insurance underwriting in the Midwest.

At the same time insurers faced an accelerating trend for severe storms in the region. According to a study released by the Rocky Mountain Climate Organization in May, using 50 years of data from 218 U.S. Climatology Network in Illinois, Indiana, Iowa, Michigan, Minnesota, Missouri, Ohio, and Wisconsin, the frequency of storms dropping between two to three inches of rain a day increased 30% from 2001 through 2010, with storms dropping three inches or more of rain in a day increasing 51%.

Tornadoes in the Midwest have also become more frequent. According to the National Climatic Data Center, in the spring and summer of 2011, "there were seven individual tornado and severe weather outbreaks with damages exceeding one billion U.S. dollars, and total damage from the outbreaks exceeding 28 billion U.S. dollars," and that the confirmed 1,625 tornadoes in 2011 (with 93 still pending) was "the second or third most active year on record for number of tornadoes since the modern record began in 1950."

Wild fires have also been a major concern in some parts of the country.

According to Insurance Information Institute president and economist Robert Hartwig, "last year there were nationally about $33 billion in insured catastrophe losses in the united states, for the fifth most expensive year in history. Unlike 2004 and 2005, when hurricanes were the dominant events, the reality is the industry has seen record or near-record thunder storm losses every year since 2008.

For insurance purposes, a thunder storm "includes everything may happen in a thunderstorm, including tornadoes, hail, lightening and straightline winds" according to Hartwig.

Hartwig says the property insurance industry has faced "a prolonged period of large-scare catastrophe losses, mostly away from the coast, which has created very substantial claim activity in parts of the country that have not usually seen losses of this magnitude," and that "over time, we see these losses trending upward.

"There have been enough weather events causing problems over the past few years, so a Hurricane is just another event," according to Weiss Ratings senior financial analyst Gavin Magor, who says that for the major property insurers, "the problem is when you keep having them and you're not reserving sufficiently and being extra competitive with your rates, underpricing to gain market share, you will suffer large unexpected losses."

"P&C insurers under a tremendous amount of pressure, and this is the one area in the insurance business where we have seen failures this year," according to Magor, who says that "11 property insurers have failed so far during 2012."

According to Hartwig, "insurers are looking at these apparently sustained trends, which have become a driver for higher insurance rates for homes and for commercial structures." The higher rates "really started last year," he says. "commercial property insurance rates as of the middle of 2012 were up 7 to 7.5% nationally, and that trend is continuing as we move through the second half of 2012.

Here's how the numbers stack up for two of the largest publicly traded U.S. property insurers:

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