Bears target insurers as Irma gains strength

First came Harvey, and now Hurricane Irma has some investors shaking in their boots.

Insurance stocks were among the financial sector's top performers through late August. They've taken a quick beating in the last week as record floods doused Texas and analysts tallied up industry losses of at least $10 billion.1

What if the storm gets worse before it gets better?  Most of Harvey's real impact, after all, came from floods that are typically excluded from normal homeowner policies. But wind damage is usually covered, and Hurricane Irma is blowing as fast as 180 mph—out-puffing Harvey's top gusts by more than 40 mph. Forecasters see it menacing Florida by the weekend.2

Progressive (NYSE: PGR) is one of the Sunshine State's top insurers.3 Options traders came back from Labor Day looking for further downside in the name, firing off two transactions shortly after Tuesday's opening bell:

  • A block of 3,000 September 47 puts was sold for $2.40 and 2,000 September 44 puts were bought for $0.60. 
  • Minutes later, 2,000 September 46 puts were sold for $1.45 and a matching number of September 43 puts were bought for $0.25.
  • Puts fix the price where a security can be sold, so they tend to gain value when a stock declines. 
  • In both trades yesterday, it appears an existing position at the higher strike was closed and rolled down to the lower level. That let them get back most of their capital at risk while remaining exposed to further drops.
  • PGR's total options volume yesterday was 9 times average amounts in the stock over the last month. Puts also outpaced calls by a bearish 8-to-1 ratio.
Progressive (PGR) 3/13/17 - 9/5/17 chart

Source: OptionsHouse by E*TRADE.

PGR ended Tuesday's session down 3.39 percent to $44.11 and has lost 9 percent of its value since the start of last week. But the stock is still sitting on a 24 percent gain so far this year thanks to rising premiums and double-digit policy growth.4

Similar trades occurred in Hartford Group (NYSE: HIG) and Allstate (NYSE: ALL). 

  • HIG: A slug of 2,000 September 53.50 puts was sold for $0.68 and 3,000 September 51 puts were bought for $0.34.  
  • ALL: An investor unloaded 1,000 September 90 puts for $2.14 and rolled into a two-legged strategy. They bought 1,000 September 87.50 puts for $0.86 and sold a matching block of September 85 puts for $0.33. Known as a vertical spread, their new position is designed to leverage a drop down to the lower strike. 
  • HIG fell 2.16 percent to $52.88 and ALL slid 3.66 percent to $86.49. Total options volume was well above the monthly average in both, with puts outnumbering calls by more than 10 to 1.

The fact traders used September puts expiring at the end of next week in all three cases suggests they see declines accelerating in the near term. Plenty of other, more obscure names like XL Group (NYSE: XL), RenaissanceRe (NYSE: RNR), and Heritage Insurance (NYSE: HRTG) have been pummeled as well.

Bottom line: Traders are looking for more pain in the insurance space as Hurricane Irma gains strength.


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1. Hurricane Harvey to Bring Up to $20 Billion in Insurer Losses, JPMorgan Predicts. 8/29/17.

2. Associated Press: Irma strengthens to a Cat 5 storm as it nears Caribbean. 9/5/17. Miami Herald: Irma becomes strongest Atlantic hurricane outside Gulf and Caribbean ever recorded. 9/5/17.

3. Bank of America Merrill Lynch: Irma threatens the Southeast. 9/5/17. 

4. Bank of America Merrill Lynch: July results support Buy thesis. 8/16/17.