Florence puts insurance stocks in play
09/14/18

●Insurers pulled back as Hurricane Florence formed, but rallied yesterday

●Crude oil prices spiked on Wednesday before retreating yesterday


More hurricanes, more market action—especially among insurance stocks, many of which have pulled back sharply as Hurricane Florence bears down on the Carolinas.

That’s an unremarkable development for market watchers who have witnessed previous hurricane seasons; insurers often get hit when hurricanes develop, as investors try to sidestep the losses these companies could potentially suffer.

Before looking at what this may mean for stock traders, let’s check on the crude oil market. “Eye of the market hurricane” detailed how crude oil futures spiked to around $71/barrel on September 4 as Tropical Storm Gordon moved through the Gulf Coast. That turned out to be the highest high of the past three-plus months, though, as oil prices retreated over the next few days. Hurricane Florence may have contributed to crude nearly matching that high on Wednesday—but the market then tumbled more than 2% yesterday amid reports of the storm’s reduced wind speeds.1

A sign the market expects the storm to wreak less havoc than expected? Perhaps, but because most of the US oil operations are concentrated in the Gulf area, East Coast storms are less likely to impact crude prices. And as has been noted elsewhere, hurricanes are just as unpredictable as markets.

In terms of insurers, the following chart compares three stocks, Allstate (ALL), Progressive (PGR), and Travelers (TRV), all of which had sold off between 3%-5% starting late last week before rebounding the past couple of days:

Allstate (ALL), Progressive (PGR), and Travelers (TRV), 6/19/17–9/13/18. The pullback before the storm.

Source: OptionsHouse

Around mid-session yesterday—just as Florence was making landfall—ALL was up approximately 1.2%, PGR was up 0.5% (and barely below its recent record high), and TRV was up 1.7%. Had the market decided the risks were already priced in?

That’s impossible to answer, but last year’s hurricane season may offer some insight. Insurers had to deal with massive back-to-back hurricanes in 2017, Harvey and Irma, both of which were Category 4 storms when they hit Texas and Florida, respectively, in August and September; both ended up being among the five costliest hurricanes on record.2 Florence, by comparison, made landfall as a weaker Category 2 storm.3 The following chart shows ALL’s performance before and after Harvey-Irma last year:

Allstate (ALL), 4/24/17–1/5/8. Allstate (ALL) price chart. Harvey and Irma, 2017

Source: OptionsHouse

Over the three-week period from August 16-September 7, ALL fell around 10%—only to recoup around half that decline in two days. Although the devastation caused by these storms can’t be understated, the hit insurers took was ultimately less than feared: Neither Allstate (ALL) nor Travelers (TRV), for example, posted quarterly losses in the first two reporting periods following these storms.

One possible reason: While flooding is often one of the costliest components of any hurricane—and the one specifically cited as the biggest risk in the case of Florence—some analysts have noted insurers have minimized their exposure by offloading some of this risk onto state and federal entities such as the National Flood Insurance Program.4

Every market scenario—just like every weather event—is unique. Veteran traders consult history, but know the key to taking profits out of the market is managing risk. Just like an insurance company.

 

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1 Bloomberg.com. U.S. Equities Pare Gains; Dollar Drops on CPI: Markets Wrap.  9/13/18.

2 The Washington Post. Harvey, Irma and Maria now in the top 5 costliest hurricanes on record, NOAA says. 1/30/18.

3 Weather.com. Hurricane Florence Long Siege is Beginning; Storm Surge, Catastrophic Flash Flooding, High Winds to Hammer the Carolinas, Appalachia. 9/13/18.

4 TheStreet.com. Allstate and Travelers Likely Spared From Worst Hurricane Irma, Harvey Damages. 9/13/17.