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Insurance isn't Floyd-proof
September 15, 1999: 1:24 p.m. ET

Storm could hit insurers' earnings, share prices after making landfall
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NEW YORK (CNNfn) - Hurricanes and other natural disasters traditionally have meant good news for insurance stocks: Calamity ushers in higher insurance rates, which sparks anticipation of higher earnings for insurance companies. That, in turn, raises investor enthusiasm and hence the share price.
     But the reality may be quite different in the wake of Hurricane Floyd, according to Bear Stearns insurance analyst Michael Smith, who shared his take on the uncertain prospects for insurance companies with CNNfn's "Before Hours."
     Following are highlights from that discussion:
     JACK CAFFERTY, CNNfn, "Before Hours:" All of the insurance companies sold off (Tuesday) presumably (on) fears about Floyd. What can you tell us about the implications of this storm should it turn inland and cause the damage that some were expecting as early as yesterday?
     MICHAEL SMITH, Bear Stearns: In general, the view is in this business, bad news is good and terrible news is better. In the past, investors have had a tendency to bid up the stocks in the aftermath of these events on the assumption that insurance companies would have to raise rates and next year`s earnings would be much better than expected. In actuality, that hasn't always proven to be the case (and) … this time it could be different. The industry right now is on much weaker financial footing than it was 7 and 10 years ago. Its underlying operations, its cash flows are much weaker today than they were (at the time of Hurricane Andrew in 1992 and Hurricane Hugo in 1989).
     CAFFERTY: Why?
     SMITH: Simply because the industry`s been in a pricing war for 12 years, and the pricing war has finally had an effect on the underlying quality of earnings to the extent where cash flow is demonstratively weaker. Investment income is falling this year only for the second or third time in the last 50 years. So right now the industry could be at a precipice where another big event could push it over. And we also have to keep in mind that right behind Hurricane Floyd is Hurricane Gert forming in the Atlantic.
     CAFFERTY: How do I play this as an investor? Do I buy these stocks on the fact that they`re being sold off yesterday ahead of a fear of huge claims and gamble on the fact that maybe the claims damage won`t be there? Or do I stay away from them based on weaker earnings as a result of the price war situation? What is an investor to do?
     SMITH: I think yesterday's (sell-off was) more related to the bond market and the concerns that insurance people will sell bonds in order to pay claims. That still leaves us with what (the industry) will have to do in the aftermath of paying those claims. And again, I think this time the story`s going to be a little bit different. I think we could see stronger pricing out of this. At the same time the insurance stocks in general are trading at trough valuations where we were at the depths of the last down cycle in underwriting in 1983 and 1984. Some (are) looking attractive in here.

     CAFFERTY: Correct me if I`m wrong. A lot of the homeowners' policies were changed in terms of the deductible following Hurricane Andrew and Hugo, where they used to have a thousand-dollars deductible. Now it might be 5 or 10 percent before the insurance actually kicks in. All of which would accrue favorably to the insurance company`s bottom line if they had to start dealing with a large number of claims.
     SMITH: That's correct, but more to the extent if it's a relatively small wind storm. If you have something on the order of a Hurricane Andrew, $16 billion of insured losses, almost $30 billion of total losses. It's not going to matter. The 10 percent deductible will still be 10 percent of the total cost of the $300,000 home that the insurance company will be picking up. Back to top


Floyd and the Fed - Sept. 15, 1999