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Hurricane Impact Material but Manageable for Insurers

We expect reinsurers to feel the biggest impact and see Travelers and Berkshire Hathaway as attractive today.

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Brett Horn: In the last two weeks we've had two major catastrophes: Hurricane Harvey in Houston and Hurricane Irma in Florida. The TVs have been filled with visuals of the damage that they've inflicted, and certainly there's a lot of economic damage resulting from these two events.

In terms of the impact on our insurance coverage, though, there's a couple of mitigating factors to take into account. First, with Hurricane Harvey, most of the damage related to Harvey is due to flooding, which private insurers do not cover. We think that will keep losses from Harvey fairly manageable for our coverage. 

For Irma, the regulatory environment in Florida is somewhat unique. Pricing has been held at a level that most national carriers find inadequate. As a result, most of our coverage, the large national carriers have very limited market share in Florida, which we think will help contain the losses, as well, from that factor. But still, the net effect of these two catastrophes will lead to material losses for the insurer, but we do believe that it will be mainly within a historical range and these don't necessarily represent unusual loss events.

That being said, I think the impact that we would see would be mostly in the reinsurance space. Those two factors that I mentioned as limiting damage for the primary carriers is not quite so operative for the reinsurers. Reinsurance is an industry that's suffered from too much capacity in terms of capital in recent years. They've had weak pricing. Frankly, it was due for events like this to re-assess the pricing environment. For the larger, more well-disciplined reinsurers that we typically cover, such as a Berkshire Hathaway, they will most likely take material losses off of these events, but those losses will most likely be offset by a more rational pricing environment in the future.

For investors looking for opportunities in the space, there's a couple of ideas we would point to. First, among primary carriers, Travelers looks most attractive to us. They have a reasonable amount of exposure to Harvey and to Irma. But what really has driven the stock recently is they have some issues in auto lines. But Travelers is a very strong franchise, especially on the commercial side. We expect those results to mean revert over time. Meanwhile, I think the market is offering opportunity to buy the shares relatively cheap. Within the reinsurance space, I think the only name that I would point to would be Berkshire Hathaway. Obviously the scope of their operations is much bigger than reinsurance, but the stock does look to be trading at a modest discount at this point.

Brett Horn does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.