Harvey and Irma Won’t Ruin This Industry

Houston has been devastated. Miami could be next…

Hurricane Harvey dropped a record 50 inches of rain on parts of Southeast Texas… flooding most of Houston and ruining everything in its path.

We’ve all seen the devastation… and some estimates have damages over $100 billion.

And by now, Hurricane Irma should be heading across Miami with winds exceeding 185 mph. This Category 4 storm is the most powerful storm ever recorded in the Atlantic Ocean.

Like Texas, Florida expects at least $100 billion in damages.

People will need to rebuild destroyed homes… replace flooded cars… and restart their lives.

Somebody is going to pay for that…

For those fortunate enough to have insurance… that somebody is the insurance company.

This hurricane season looks to be among the costliest ever… Does that mean we should sell our insurance stocks?

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Storms Don’t Damage Insurance Stocks

Here at the Daily, we don’t like to do anything rash without first seeing what’s happened in the past.

While Wall Street and its computer algorithms sell insurance stocks on headline news alone, we’ll look a little deeper.

And what we found was surprising.

The S&P Insurance Index tracks health, life, property, and casualty insurance companies.

Hurricane Sandy ripped through New York and New Jersey in late October 2012. The chart below shows what happened to the index.

Sandy caused about $75 billion in damages to homes and infrastructure. That includes flooding in New York City’s subway system.

Some places were without power for months.

But the damage to insurance companies was short-lived. The index fell only 5% before rebounding. Insurers recovered all the losses within a month.

But Sandy is far from the costliest hurricane in recent history.

That distinction belongs to Hurricane Katrina in 2005. Estimates of damages from that hurricane are as high as $250 billion.

Here’s what happened to insurance stocks after Katrina slammed into New Orleans.

As you can see, these two events barely caused a blip in the price of insurers. The 3% fall is just market noise.

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If You Hold Insurance Stocks, Stay Calm

Natural disasters usually don’t hurt insurance stocks.

Here’s why…

All well-run insurers (which most of them in this index are) diversify their risk. They do this by only issuing a certain number of policies in danger zones.

Insurance companies also buy reinsurance contracts. Reinsurance contracts are essentially insurance for insurers.

There is a deep and complex network of reinsurers around the world. That spreads the risk amongst all companies.

The big, diversified insurers can survive these catastrophes. And that’s why, after the initial dip, insurance stocks recovered.

Insurers know the risks and prepare for these scenarios.

(Note: I’m not talking about Florida insurance companies. These companies mostly sell hurricane insurance in that state. They’re not diversified and can be wiped out if a major storm hits.)

Right now, Harvey and Irma are dragging down insurance stocks as they unleash their fury.

Investors don’t like the uncertainty. As you can see in the chart below, stocks have already fallen 3%.

If history repeats itself (which it usually does), we will see insurance stocks recover all of their losses and continue their bull market.

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An easy way to get broad exposure to insurance companies is to buy the SPDR S&P Insurance ETF (KIE). This ETF tracks the index mentioned above.

Don’t let headline news scare you… Not every catastrophe will have a lasting impact on stocks.

Regards,

Nick Rokke, CFA
Analyst, The Palm Beach Daily

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