If You’re Looking for Post-Storm Bargains, Consider These Insurers

Hurricanes Harvey and Irma have together caused billions of dollars in property damage, disrupted countless businesses, and tragically, cost dozens of lives.

But as I wrote recently, the restoration and rebuilding process will be massive. In fact, it’s already underway in places like Texas and Louisiana. And my job in this space is to discuss ways investors like you can participate in that recovery, as well as other events that impact the markets.

One sector that might be worth looking at: Insurance stocks. Both primary insurers and the reinsurance companies that financially back them up have gotten hit hard recently due to spiraling loss estimates for these twin storms. Just look below at the Insurance Stock Screener I created.

It contains every HOLD or BUY rated insurance company in our coverage universe with at least $50 million in market capitalization and 50,000 shares in average daily trading volume. I included columns for dividend yield, market capitalization, and longer-term performance. But I sorted by 3-day total return (through 9/6/17) to highlight the nasty hits many have taken on hurricane fears:

Data Date: 9/6/2017

You can see that HCI Group (HCI, Rated “C+”) dropped almost 21% in only a few days, while Heritage Insurance Holdings (HRTG, Rated “C-”) tanked 18%. Many other insurers and reinsurers fell by the high single-digits, making last Tuesday the worst day so far in 2017 for insurance stocks.

The ultimate losses tied to both storms won’t be known for months, if not years. They could easily run into the tens — or even hundreds — of billions of dollars when you consider direct losses to cars, homes, businesses, and farms, as well as indirect losses for things like business interruption. But history suggests that once losses are even somewhat quantifiable, more-diversified insurers who have the capital to withstand them could prove to be bargains.

Take Hurricane Katrina in August 2005. Its inflation-adjusted losses totaled a staggering $50 billion. In the week leading up to the strike and its immediate aftermath, Hartford Financial Services Group (HIG, Rated “B”) dropped 6.3%, Chubb Ltd. (CB, Rated “A-”) fell 3.7%, and Travelers Cos. (TRV, Rated “A-”) fell 6.1%.

But as tragic and severe as Katrina was from both a financial and human perspective, the damage to insurance stocks mostly proved short-lived. If you had bought the post-strike low in Travelers and held through year-end 2005, for instance, you would have made almost 9%. You could’ve racked up more than 20% gains on HIG doing the same thing, or 23% on CB.

Again, I don’t want to minimize the very real costs (in every sense of the word) to these storms. But when you factor in how insurers backed by the federal and state governments will absorb a large chunk of the losses … and how insurers will surely raise premiums on future policies in the wake of these storms … you can see how investing in the sector’s leaders could pay off. That’s especially true if you can get in at bargain-basement prices.

So I recommend combing through the stocks in my Screener and seeing if some of the highest-rated names make sense for your portfolio. I’ll certainly be doing that for my High Yield Investing newsletter in the days and weeks ahead. If you aren’t already on board, consider clicking here to get your hands on those potential recommendations, as well as all my “buy” and “sell” signals on an ongoing basis.

Until next time,

Mike

P.S. If you would also like to donate to the Harvey relief efforts, there are many ways you can do so. This ABC News story gives you several options, and this New York Times story lists several others.