Harvey’s Impact on Insurers Should Be Manageable
Although the estimates of total losses remain in flux, we don’t expect any material changes to our fair value estimates for property-casualty insurers.
While estimates of total insured losses remain in flux, it is clear that Hurricane Harvey has caused considerable damage in Texas. We expect most of the property-casualty insurers we cover to incur material losses.
Still, the impact should be manageable, and we are doubtful that the hurricane will have a material impact on any of our fair value estimates or on pricing trends in the industry. We would note that our models account for the possibility of large natural catastrophe losses, even though the exact timing is impossible to predict.
Within our coverage, Allstate (ALL) has the most exposure to Texas by far, with a little over $1 billion in annual homeowners' premiums in the state and 12% market share. The other companies with material Texas exposure include Travelers (TRV), Chubb (CB), and Progressive (PGR). Commercial carriers could see meaningful losses as well, given the potential disruption to the oil industry.
We would see any major downward movement in stock prices more as an opportunity, although historical results suggest any market reaction will be fairly muted. In our view, Travelers offers the best relative value among carriers with significant exposure.
While its exposure is limited, Harvey could present a test of sorts for Progressive, given its relatively recent move into homeowners insurance. Overall, we are positive on this shift, as it creates opportunities for bundling and appears to have had a meaningful positive impact on growth in auto lines, an area where we think Progressive enjoys a narrow moat. However, participation in homeowners lines creates a level of volatility that the company has not had to deal with historically. The market awards one of the highest book multiples in the industry to Progressive, owing to its strong and steady returns, and we are curious as to how the market might react if catastrophe losses lead to a bum quarter or year.
In terms of private insurance losses, the type of damage Harvey causes is critical, as private carriers generally cover only wind damage, while flood damage is largely covered under government programs. For instance, while the industry incurred substantial losses due to Sandy in 2012, the government covered roughly 75% of insured losses, as it stayed offshore and most of the damage was related to flooding. It appears that the mix of the damage from Harvey will tilt heavily in the direction of flooding as well.
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Brett Horn does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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