The year 1992, with its hurricanes, riots, earthquakes and flooding, has offered up all the subplots of an Irwin Allen disaster movie. It hasn't, however, been a financial disaster for property and casualty insurers. They're more than up to the task, with $160 billion in capital to cover a list of catastrophic losses expected to exceed $14 billion.
In fact, some stocks of insurers with large property and casualty businesses have become stronger performers in the wake of Hurricane Andrew. That's based on a belief the hurricane's expensive aftermath will trigger a boost in insurance rates and a long-awaited increase in industry profits. Among such stock gainers have been Marsh & McLennan, General Re Corp. and Chubb Corp.
Yet this confidence about price boosts isn't strong enough to extend to all carriers. Another tier of these stocks, among them Aetna Life & Casualty, CIGNA Corp. and Travelers Corp., hasn't participated in this post-hurricane stock price rise much at all. Compare that with the aftermath of Hurricane Hugo, when virtually all property/casualty stocks outperformed the overall stock market as much as 10 percent in anticipation of increases in premiums.
These days, analysts aren't entirely sure whether all insurers are willing to forgo their ongoing battles for market share in order to revive industrywide profitability. Mother Nature moves quickly, but trends in the property/casualty business evolve slowly.
"Winds are buffeting the property/casualty industry from two directions," explains Fred Sandburg, analyst with Kemper Securities. "On one side are losses affecting individual insurers, while on the other side is the potential that the magnitude of
losses means a greater emphasis on rational pricing."
Although no major insurers are expected to be hurt badly by this year's hurricanes, such events usually put some smaller regional carriers out of business.
"Hurricane Andrew is the match we have been waiting for that will ignite the property/casualty business, which has been in a down cycle for five years," says Steven Gavios, analyst with Kidder Peabody. "It has been due for a turn for a long, long time."
Cycles are common, with long periods of pricing "atrophy" followed by brief pricing increases, usually lasting about two years, says Weston Hicks, analyst with Sanford C. Bernstein.
"Short term, the property/casualty companies can pay for losses, but long term there will be pricing increases," predicts Marc Rosenberg, vice president for federal affairs in Washington with the Insurance Information Institute. "By law, insurance companies aren't allowed to charge extra in 1993 because they lost money in 1992, but they are allowed to charge extra in anticipation of such events."
In terms of actual premiums charged to homeowners, they typically rise only in the states directly affected by a catastrophe, Mr. Rosenberg adds.
For investors willing to take a gamble on whether stocks of insurers with large property/casualty businesses are ready for a resurgence, there are many choices. The stocks of American International Group, General Re Corp. and Chubb Corp. are recommended by both Mr. Sandburg and Mr. Gavios.
"These companies are consistently good underwriters, and they have investment portfolios that allow me to sleep at night," notes Mr. Sandburg.
St. Paul Cos. stock is also recommended by Mr. Sandburg, while Mr. Gavios likes Marsh & McLennan and NAC Re Corp. Mr. Gavios would wait for more evidence of an upturn in the insurance cycle before upgrading Continental Corp. and St. Paul Cos. from hold to purchase.
"Marsh & McLennan is the largest insurance broker in the world and it will be among the first to benefit because its commissions will rise with better pricing," says Mr. Gavios. "But remember that pricing never turns overnight, and I wouldn't expect a material change in industry pricing to be noted until the beginning of 1993 in the January renewal season."
Meanwhile, the stocks of Aetna Life & Casualty, CIGNA Corp. and Lincoln National Corp. are recommended by Mr. Hicks.
"The property/casualty companies generally have around 40 percent of their capital in the property/casualty business, and their earnings will benefit significantly when pricing increases occur," concludes Mr. Hicks. "However, it won't be an immediate event."