The storms that continue to ravage the Midwest, leaving entire towns devastated in their wake, are already negatively impacting insurance company coffers. Making matters worse, hurricane season is set to begin on June1st, a historically difficult time for the region. Needless to say, the insurance sector is bracing itself for a couple of tough quarters, and investors would be wise to do the same thing.
In the short term, this does not bode well for insurance company stocks like Travelers (Ticker: TRV), Allstate (Ticker: ALL) and American International Group (Ticker: AIG) in particular, as they are three of the largest insurers in the East and Midwest regions of the U.S. As counter-intuitive as it sounds however, long term prospects for the industry are not nearly as bleak, at least if history is any indication.
The Impact
To get a sense of just how badly insurance companies may be stung, Allstate recently announced they expect to take big charges in the quarter, possibly to the tune of $1.4 billion in catastrophe losses. No word from Travelers or AIG as yet, but the prospects do not look good. As an industry EQECAT, a firm that provides risk models to insurance companies, estimated the industry may be hit with losses totaling $10 billion before the year is over. This hefty figure compares to an average of $2 - $4 billion annually, a significant increase to say the least.
Of course, the recent weather-related problems come on the heels of several international catastrophes, Japan included. While international flooding and weather-related tragedies did not have a major impact on U.S based insurance companies because of Japan's insurance oversight requirements, it certainly doesn't help matters.
Longer Term
For consumers, and this may be the silver lining for investors, higher premiums are on the way. For over 400 schools in Oklahoma, higher rates have already been announced, and more are expected to follow.
And this is where the opportunity comes in. Historically, insurance companies have bounced back nicely after a bad year of losses. In the near-term, property and casualty insurers are going to have a difficult time absorbing the financial impact of huge payouts. But with the rise in premiums on the horizon to offset at least some of the expenses, the sector is worth keeping an eye on for bargains. As is often the case, when a sector falls opportunity isn't far behind, and those companies that are able to weather the financial storm are worth a close look.