Shares of property and casualty insurers rose after the damage from Hurricane Irene appeared to be less than the market had predicted.
Complete clarity on loss estimates will not be known for some time, but research firms say based on weaker-than-forecast wind speeds, particularly for the New York metropolitan area, the total loss for the sector is likely less than the initially expected range, which some had been pegging as tens of billions of dollars.
Shares of large insurers Allstate Corp. (ALL) and Travelers Cos. Inc. (TRV) jumped 7.2% and 4.7%, respectively, in recent trading, while other smaller insurers also traded up. The KBW Insurance Index rose more than 4%, exceeding broader market gains.
Late last week, as worries grew about how powerful Hurricane Irene might be, shares of insurers took a hit. On Thursday, Aug. 25, Allstate and Travelers Cos. both lost about 3%, while Tower Group Inc. (TWGP) fell 5.4%. Tower Group, which has a more concentrated exposure to the New York metropolitan area than other companies, lost another 4% on Friday.
“We think it is safe to say that loss expectations are lower than many investors thought last Thursday and Friday when forecasts shifted to show a more inland path for the storm,” said FBR Capital Markets in a note. Still, the storm will cost insurers such as Allstate, Travelers and Tower Group a good portion of their earnings for the third quarter, the firm said. At this point, FBR said, it appears Irene will be more of an earnings than a capital event.
The worst of the damage from North Carolina to New York appeared to be the result of flooding–which isn’t covered under standard homeowners’ policies. Disaster-modeling firm Eqecat Inc. estimated the hurricane caused between $200 million and $400 million in insured losses in North Carolina and South Carolina. It is yet to release its loss estimate for mid-Atlantic states, New York and New England.
Several research firms said they see Hurricane Irene as more of a hit for primary insurers than reinsurers, and recommend buying reinsurers, as property-catastrophe reinsurance rates will likely rise when insurers renew coverage. UBS suggested in a note that investors buy Everest Re Group Ltd. (RE) and Validus Holdings Ltd. (VR), which it says have the ability to absorb major hurricane loss and take advantage of market conditions without having to raise new equity capital. Macquarie Capital said its top picks in the reinsurance space are Arch Capital Group Ltd. (ACGL), XL Group PLC (XL), Validus Holdings and Montpelier Re Holdings (MRH).
Shares of Everest Re rose 4% to $80.26 in recent trading, while Arch Capital climbed 3.8% to $33.88, XL Group added 5.5% to $20.33 and Validus and Montpelier both rose 4.6%, to $25.73 and $16.68, respectively.
New York, August 29, 2011, (Dow Jones)