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Insurance Stocks to Endure the Wrath of Hurricane Harvey

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e massive trail of destruction in Houston and Texas Gulf Coast in the wake of Hurricane Harvey has left insurers feeling jittery in the fear of high claim costs. While its too early to estimate the loss incurred due to the calamity, one of JPMorgan analyst’s anticipates potential losses to range anywhere from $10-$20 billion.

Harvey, which went from a tropical storm to a Category 4 hurricane, is expected to be among the top 10 financially damaging catastrophes ever to strike the United States.

Is There a Silver Lining to the Cloud?

On the face of it, catastrophe losses cause a spike in loss ratio and hurt insurer's underwriting margins. However, these losses act as catalysts in turning the industry's pricing cycle. Notably, insurance industry is highly cyclical in nature, and is characterized by periods of soft and hard pricing phases.

Major events like Harvey are required by the industry now to turn the pricing cycle. A benign cat loss environment in the recent years fattened the capital reserves of the insurers resulting in the loosening of underwriting standards as insurers equipped with huge cash did not mind undertaking risky businesses at low prices. This heightened competition and insurers were compelled to lower prices further to attract more business. Eventually, pricing woes crept up, as evident by the continued soft pricing in many insurance business lines.

Though the industry suffered a cat loss of $21.6 billion in 2016, it was only a modest increase compared with the 10-year average of $19.1 billion.

A recent report by Swiss Re states that global insured losses from disasters plunged to $23 billion in the first half of 2017 from $36 billion in the year-ago period.

Lower levels of claims from natural catastrophes and other disasters suppressed demand for insurance against such events, consequently putting pressure on premiums.

Further, a report from insurance broker Marsh stated that global insurance rates fell for the 17th consecutive quarter, with property insurance rates down 2.8%.

In a recent fact release, the Information Insurance Institute stated that the private insurance industry will easily able to handle losses from Harvey As of Mar 31, 2017, the U.S. property/casualty industry has $709 billion of capital, a cushion that is more than adequate to deal with events like the one mentioned above.

Nevertheless, the industry has outperformed the broader market in last two years, evident from a return of 32% compared with the S&P 500’s gain of 24%. 

Insurance Stocks in Focus

Companies such as Allstate Corp. (ALL - Free Report) , Berkshire Hathaway Inc. (BRK.B - Free Report) , and Progressive Corp. (PGR - Free Report) have a significant presence in the region with market share of nearly 13%, 11% and 9%, respectively. Other companies with presence in Texas are MeLife Inc. (MET - Free Report) , Kemper Corp., Chubb Ltd. among others. However, these companies have considerably lower market share in the region.

Shares of both Progressive and Berkshire Hathaway fell by 2.3%, while Allstate and Travellers declined 1.5% and 2.6%, respectively, on Aug 28, the first trading session after Harvey struck on the night of Aug 25.

Nevertheless, some of the stocks gained the following trading day on the likelihood of benefiting from raised premiums due to the devastation caused by Harvey.

Conclusion

It remains to be seen weather-related losses over the coming months can shrink the massive capital surplus and change the insurance pricing cycle of the industry.

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