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After hurricanes, time to buy insurers
If history is any guide, insurance stocks are headed for a solid run as investors bet on rate hikes.
November 9, 2005: 7:51 AM EST
By Shaheen Pasha, CNN/Money staff writer

NEW YORK (CNN/Money) - For insurance investors, it's a perverse reality: bad news is good news.

In the wake of this year's severe hurricane season, the insurance industry faces $40.8 billion in insured losses in the third quarter, according to ISO's Property Claim Services unit, making 2005 the costliest year in history for catastrophes.

Yet the S&P Property Casualty Insurance index climbed more than 6 percent in the last 3 months and year-to-date is up 14.6 percent.

So why are investors eager to plow money into an industry facing monumental losses?

Consider it a bet on the future. Given the level of estimated losses from catastrophes and the widespread expectation that severe hurricanes will be the norm for the next two decades, analysts said investors are betting that insurance companies and reinsurers will raise rates significantly in the months to come.

Peter Streit, insurance research analyst at Williams Capital Group, said he expects rate increases of 20 percent to 40 percent as less capital becomes available for the reinsurers who offer insurance to property and casualty and other insurers. With insurers poised to pay more for coverage from reinsurers, they'll probably transfer the extra costs to consumers.

Higher rates equal higher profits, which will translate into higher stock prices going forward, he said.

History on side of insurance gains

And if history is any indicator, insurance stocks are in for a heady run in the coming months -- and might still be a good buy even after their recent run.

Insurers such as Allstate (Research), St. Paul Travelers (Research), and Hartford Financial Services Group (Research) have particular exposure to the hurricane-prone Southeast while reinsurers like RenaissanceRe (Research) and XL Capital (Research) were also affected by this year's storms.

Insurance stocks, as a general rule, dip after a catastrophic event but then steadily rise as investors begin to smell rate increases in the works.

Following Hurricane Andrew in August 1992 -- the second costliest hurricane after Katrina -- the S&P Insurance Index managed to climb over 16 percent by the end of the year.

Even after the Sept. 11 attacks, the insurance industry managed to rebound by the end of the year. Rate increases after the attacks helped pave the way to a more fundamentally sound sector, industry experts said.

David Bradford, editor-in-chief at Advisen, an information service provider for the commercial insurance industry, said reinsurers are poised to see higher rate hikes than primary insurers, which could make reinsurers a good bet for investors to place their money.

Insurance rates may not climb long-term

But Bradford also said he would be wary of expecting the rise in insurance stocks to be a long-term phenomenon.

While the sector had a nice run following past hurricanes such as Andrew and the barrage of four deadly hurricanes to hit Florida last year, the industry is in a stronger capital position now, which may curb the level of rate increases it could get, he added.

With over $400 billion in capital at the end of 2004 and with another $32 billion in earnings in the first half of the year, Bradford said, the industry was able to absorb the monumental losses. That could make it harder to justify substantial rate increases in the long run this time around, he said.

"I think we're going to see a short-term spike in rate increases but I don't think we'll get more than a year of rate increases unless something really radical happens," he said.

But Robert Hartwig, chief economist at Insurance Information Institute, said investors may take heart from a number of positives for the industry.

Aside from catastrophe-related rate hikes, Hartwig said, insurance stocks are also benefiting from rising interest rates which will generate more investment income. Insurance companies have huge investment portfolios.

And investors are breathing a sigh of relief as the headline damage from New York Attorney General Eliot Spitzer's investigation into the industry has faded.

These factors combined could make the insurance sector a solid buy in the near-term.


Recent storms have caused Allstate to pullback from some of the hard-hit areas. Find out more here.  Top of page

Allstate Corporation
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