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Insurers Can Stay Calm While Harvey Wreaks Havoc: 4 Picks

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The untold damage and misery caused by Hurricane Harvey is not just being felt by the residents of Texas. Markets were also singed by the tropical cyclone on Monday, with energy and financials bearing the brunt of the pain. Stocks of energy companies suffered after key refineries in Texas had to close due to widespread flooding. But losses for insurers were possibly the most alarming, with the iShares U.S. Insurance ETF losing 1%.

This was possibly a reaction to the enormous level of claims likely to be generated in the aftermath of this disaster. However, industry watchers think that the industry has the ability to absorb resulting losses and may even gain in the months ahead via higher rates. Adding select property and casualty insurers to your portfolio makes for a prudent option at this point.

Insurers Possess Sufficient Capital

Market watchers believe that insurers and reinsurers possess sufficient capital reserves to withstand the losses incurred by Hurricane Harvey. The damage generated by this Category 4 storm is yet to be correctly estimated. However, it is the fiercest hurricane to impact Texas since 2008. Even now, continuous rainfall is flooding the affected areas of the state. Current projections are that the hurricane may cost the U.S. nearly $30 billion.

However, insurers serving individuals and businesses currently sport appreciably high levels of capital. Additionally, they do not require such funds to back existing obligations. Given such a state of affairs, Hurricane Harvey is unlikely to dent insurers’ financial position. At most, insurers with business concentrated in the storm-affected areas would experience a fall in quarterly earnings.

Gains Likely in Months Ahead

In 2005, insurers had suffered losses in the immediate fallout of Hurricane Katrina. Yet, over the next three months, industry heavyweights such as Chubb Limited (CB - Free Report) , The Progressive Corporation (PGR - Free Report) and The Allstate Corporation (ALL - Free Report) notched up heavy gains. While Progressive and Allstate shares increased 20% and 10%, respectively, shares of Chubb skyrocketed over this period, gaining 27%.

A similar scenario is likely to develop this time around as well. First, analysts think that the federal government’s National Flood Insurance Program will have to bear the lion’s share of losses incurred by Hurricane Harvey. Second, insurers will once again be able to raise rates in the aftermath of a storm of such ferocity. Reinsurers will also likely benefit since over the medium term they will gain the ability to increase their insurance rates. In the aftermath of Katrina, the likes of Marsh & McLennan Companies, Inc. (MMC - Free Report) , which is an insurance broker, notched up gains in keeping with insurers.

Our Choices

Despite initial losses, insurers should withstand the impact of Hurricane Harvey without much difficulty. Appreciably high capital reserves provide them sufficient cushion for such an eventuality.

Further, they could actually move higher in the months ahead as they begin to raise rates. Investing in property and casualty insurers looks like a smart option at this point. However, picking winning stocks may be difficult.

This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score. 

We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.

First American Financial Corporation (FAF - Free Report) provides financial services through its Title Insurance and Services segment and its Specialty Insurance segment.

First American Financial has a Zacks Rank #1 (Strong Buy) and a VGM Score of B. The company has expected earnings growth of 5.3% for the current year. Its earnings estimate for the current year has improved 9.2% over the last 60 days

Atlas Financial Holdings, Inc. (AFH - Free Report) provides commercial automobile insurance policies primarily in the U.S. through its subsidiaries.

Atlas Financial Holdings has a VGM Score of B. The company has expected earnings growth of more than 100% for the current year. Its earnings estimate for the current year has improved by 4.5% over the last 30 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank tocks here.

The Navigators Group, Inc. (NAVG - Free Report) , together with its subsidiary companies underwrites property and casualty, ocean marine, professional liability and other specialty insurance products and services within the U.S. and abroad.

The Navigators Group has a Zacks Rank #2 (Buy) and a VGM Score of B. The company has expected earnings growth of 7.2% for the current year. Its earnings estimate for the current year has improved by 3.5% over the last 30 days. 

Greenlight Capital Re, Ltd. (GLRE - Free Report) offers property and casualty reinsurance services and products on a global basis.

Greenlight Capital has a Zacks Rank #2 and a VGM Score of B. Its earnings estimate for the current year has improved by more than 100% over the last 30 days.

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