Riding out the storm
First of all, my thoughts go out to all those who were directly or indirectly affected by this year’s hurricanes which swept across Texas, Florida and the Caribbean islands. My family in South Florida made it through okay although many in the area are still without power.
Hurricane Irma fortunately turned out to be less of a catastrophe than the most dire predictions made when the storm was raging across the Caribbean. However, Irma could ultimately still be classified as one the top five hurricanes of all time in terms of damages when the final results are tallied according to several independent catastrophe modelling agencies.
Barclay’s insurance analyst, Jay Gelb last week reported he expects insured costs from Irma to amount to about $60 billion which includes damages inflicted from the storm’s direct hit to several islands as a Category 5 storm and then crossing over the Florida Keys as a Category 4. That level of cost makes Irma the fifth worst in history, higher than Hurricane Andrew’s inflation-adjusted $48 billion rampage in 1992.
As bad as the storm now appears, damage estimates had gone to as high as $150 billion just prior to the hurricane’s landfall in South Florida when some forecasts predicted it staying strong and taking a path directly up the Eastern seaboard. Combining Hurricane Harvey with Irma makes 2017 a “double-cat” year with total wind storm impact estimated at around $100 billion.
The S&P Insurance stock index has rallied about 5 per cent from the bottom, following a decline of almost 8 per cent into the end of the first week of September. The broader market as measured by the S&P 500, hit a brand new high last week, but many insurance stocks are trading well below their 2017 highs.
Analysts we follow see claims hitting earnings in the near term on exposed primary and reinsurance companies. However, because of several quirks in the industry, primary insurers are less impacted than some might expect.
For example, private insurers in Texas generally do not cover flooding, which was a major factor for Harvey while Florida insurance companies have limited market share due to a unique regulatory environment. That leaves reinsurers bearing the brunt of the costs.
While reinsurance company earnings are likely to be challenged over the next two quarters, the industry remains well capitalised and the consensus view is that the major players will come out okay, although some reinsurers may take some hits to their book values.
Last week, Munich Re warned it would miss its profit target for the year, making it the first major reinsurer to warn of an earnings reduction from expected damages. More such announcements are anticipated in the coming weeks.
Bermuda insurers could eventually benefit from better pricing which would help make up for 2017 losses, however investors face greater near term uncertainty as earnings are pressured. Everest Re, XL Group, RenaissanceRe, Validus and Aspen are expected to see the highest losses.
Trading in line with the common stocks, insurance sector preferred issues declined in late August and early September but have since rebounded somewhat. Many pref issues are still trading well below their summer highs and we see the hybrid space a good place to get ‘paid while you wait’ as industry players scramble to shore up their balance sheets. In general, preferred spreads have been trading relatively tight, but several insurance issues have widened out and are providing reasonable value on an issue-specific basis, in our opinion.
Bryan Dooley, CFA, is the senior portfolio manager and general manager of LOM Asset Management Ltd in Bermuda. Please contact LOM at 441-292-5000 for further information.
This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their Brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority.