US property insurers like Travellers Cos Inc and Chubb Corp were expecting a relatively mild fourth quarter for catastrophe losses, but a series of punishing storms across the country in December may have blown away those estimates.
That could add more reason for investors to sell property insurance shares, already under pressure from a weak market, limited pricing power and depressed valuations.
Floods in Southern California, a blizzard in the Northeast and deadly tornadoes in the South lashed the country during the holiday season. Add to that a storm in early October that roiled the Midwest and South and ranks as one of the five worst in the world for the year, and some of the more optimistic estimates may now be endangered.
"I don't think you can have the almost nation-wide type of severe weather we had without it having an impact," said Craig Fehr, an analyst at Edward Jones. Fehr said he was already expecting insurers' combined ratios - a measure of underwriting profitability that divides losses and expenses by premium earned - to rise in the fourth quarter. The storms are likely to push those ratios even higher, which translates to lower profitability.
That is the last thing investors in property and casualty insurers want to hear, with valuations already at a cyclical low.
Property insurers' shares trade at a median of 0.99 times their book value, or the net value of their assets, according to Thomson Reuters data. Valuations typically hover around book value in bad times, and twice book value in better times. Analysts said current valuations could fall even lower, particularly for companies like Travellers and Chubb.
"We recommend investors take profits in P&C insurance stocks (especially the insurance brokers) due to our outlook for challenged near-term results for P&C and concerns about a lack of pricing power," Barclays Capital analyst Jay Gelb said in a note.
Going into the last three months of the year, most of the major property insurers forecast relatively limited catastrophe losses and raised forecasts for the year as a result. Having dodged a bullet during hurricane season, they had little reason to expect anything worse over the holidays.
Instead, Los Angeles got six months' worth of rain in a couple of weeks, New York and New Jersey saw one of the five worst snowfalls of the last century, and parts of Arkansas and Missouri were hit by twisters that struck in the one week of the year when they were least expected.
Those storms followed a major Minnesota blizzard earlier in the month and a number of other storms during the quarter, including early-October tornadoes that caused nearly $1.5 billion in insured losses. While official damage estimates are still hard to come by, anecdotal evidence suggests they could be substantial. Media reports out of Southern California alone suggest damages of more than $70 million just from floods. Barclays Capital cut earnings estimates for Travellers, Allstate Corp and Hanover Insurance Group by anywhere from 8 cents to 11 cents per share on the effect of the year-end storms.
"Our sense is there is still risk of higher-than-modelled (fourth quarter) weather-related catastrophe losses for the commercial lines insurers, and to a lesser extent the personal lines insurers, based on the December blizzard impacting the East Coast as well as the Southern California rainstorms," Gelb said.
The fourth-quarter weather events appear to be far outside the usual trend for that time of year. According to the Insurance Information Institute, fourth-quarter catastrophe losses were $205 million in 2009, down from $275 million in 2008. A spokeswoman for the III said 2010 was among the six most loss-intensive years for the insurance industry since 1980.
While a debate is raging within the industry about the nature of changing catastrophe patterns - some blame global warming, some say it is nothing more than a statistical blip - there is little disagreement that the storm cycle has become increasingly unpredictable.
"There could be some surprises" in fourth-quarter results, said Morningstar analyst Drew Woodbury. "It's fair to say the blizzard definitely caused some losses, more than we expected when we were finishing up the quarter".
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