Hurricanes May Blow Away Insurance Earnings

NEW YORK ( TheStreet) -- Property/casualty insurers' profits could be plundered if the hurricane season that kicks off June 1 translates into significant losses, analysts say.

Recent tornados in the Midwest, coupled with major insured losses following the Japan and New Zealand earthquakes, have drained insurance coffers and shareholders could take a beating if a large tropical storm strikes the U.S.

"If there are significant losses this season then buybacks or derivatives will be the first casualty," said Stifel Nicolaus analyst Meyer Shields.

The National Oceanic and Atmospheric Administration forecast that there will above average hurricane activity in 2011. The center predicts and that there could be 12 severe storms, with three to six hurricanes that are Category 3, 4, or 5 with winds of 111 miles per hour.

Insurers are already likely to report large losses this year tied to the Japan earthquake, winter storms, recent tornadoes, and floods in second quarter earnings.

"Almost certainly it is going to be a tough year. Insurers such as Allstate ( ALL) and Cincinnati Financial ( CINF) have already said they will see some large losses in the second quarter due to different catastrophes", said Paul Newsome, analyst at Sandler O'Neill.

Allstate said it could incur an estimated $1.4 billion in catastrophe losses and Cincinnati Financial estimates it could see losses of $150-$200 million in losses due to storms in April.

In addition Unitrin ( UTR) pre-announced they could see losses of $65 million and $75 million. Newsome said that he also expects Chubb ( CB), Progressive ( PGR) and Travelers ( TRV) to issue cat reports in advance of second quarter earnings.

"The core dynamic is that there has been lots of capital piled up in P/C companies, but we have seen a lot of catastrophes this year," said Nicholas Potter, a partner at Debevoise & Plimpton.

Those insurers that Newsome expects could get hit the hardest this hurricane season are Allstate, American International Group ( AIG) and Travelers because they are the largest insurers on the east coast along with State Farm. Shields adds that often once hurricane season begins, investors should keep an eye open for opportunities to pick up shares in ACE ( ACE), Arch ( ACGL), Endurance ( ENH) and XL Group ( XL) at more affordable prices. He says these insurers have significant capital set aside for losses.

If this hurricane season is particularly active analysts believe that there will be rate increases or increased consolidation within the property/casualty industry.

"There could be rate increases of anywhere from five to twenty percent," said Shields. "A heavy hurricane season could also escalate consolidation. You could see the stronger insurers picking up the insurers that got hit the hardest."

Shields said that Flagstone ( FSR) is an insurer that is in somewhat of a weaker position at the moment due to catastrophe losses. The insurer and reinsurer reported a net loss of $161.2 million for the first quarter of 2011.

"As seen across the industry, the first quarter of 2011 was extremely challenging given the large number of significant international catastrophes," Flagstone CEO David Brown said in a first quarter earnings press release. "We believe our overall capitalization remains strong and more than sufficient to withstand A.M. Best's capital stress test which considers additional shock losses for future events."

--Written by Maria Woehr in New York.

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