Insurance companies are in a tough spot with this year’s stronger-than-average hurricane season, while climate-related perils continue to push catastrophe losses higher. Here’s how to invest around it. The insurance industry typically responds to large losses by reducing the availability of insurance and raising prices to offset the claims they expect to pay policyholders. This year, insurers could face extra pressure as the Atlantic hurricane season is running above average , with 14 named storms, four hurricanes and three major hurricanes so far. Adding fuel to the industry’s woes is the higher frequency of secondary perils, such as wildfires and flooding, due to climate change. These increased occurrences have been slowly adding to primary insurers’ catastrophe losses and limiting profitability. The S & P insurance group is up about 4% this year, significantly underperforming the broader market. The iShares U.S. Insurance ETF , which tracks 55 life, property, casualty and full line insurers, has only gained 3% in 2023. Shares recover? While the industry is currently in the middle of peak hurricane season, insurance stocks typically rebound when the size of the insured losses become apparent or are announced by the companies, according to Piper Sandler. Insurance stocks tend to fall initially as big hurricanes near landfall and the likely extent of damage is appraised. “The reason insurance stocks tend to fall and then rebound during a hurricane event is the stock market does not like the uncertain nature of the potential losses,” said Paul Newsome, a managing director at Piper Sandler. Even in the face of major hurricanes, investors can take advantage of dislocations in major insurance stocks because of the short-term uncertainty, according to Newsome. The Wall Street firm believes that companies with market share in catastrophe-prone insurance lines such as home insurance and commercial policies in Florida face the greatest peril and are the most vulnerable to sell offs. Companies with large primary weather catastrophe exposure include Allstate , American International Group , Chubb , Progressive and Universal Insurance Holdings . Secondary perils Hurricanes and storms apart, insurers are also grappling with so-called “secondary perils” stemming from climate-related events such as wildfires, thunder and electrical storms that are called severe convective storms , hail and flooding. The wildfires on Maui in Hawaii, as well as the residual impact from tropical storm Hilary in California in August, have shown that these incidents can cause large potential losses, according to Bob Huang, equity analyst at Morgan Stanley. “Secondary perils are becoming larger risks for primary carriers,” Huang said. “The recent Maui fire … shed light on the higher frequency from secondary peril events.” Catastrophe losses for primary carriers could be particularly high this year with tighter reinsurance terms and conditions, and elevated reinsurance pricing, according to Huang. However, this environment creates a boost for reinsurance demand and supports reinsurance pricing in the future, Morgan Stanley said. The firm said Arch Capital and Everest Re Group , two reinsurers that it rates overweight, are the best positioned. “We continue to believe reinsurance pricing will remain strong through 2024,” Huang said.
