Wall Street Journal: For Some Insurers, a Post-Storm Surge?
Jul 7, 2009
By LIAM PLEVEN
Published on July 7, 2009
For property insurers, the short-term losses from hurricane season are often outweighed by long-term gains. But this year’s season — calendar-wise this is the heart of it — could leave some players hobbled while others come out ahead.
After a hurricane, property insurers often sustain large losses on existing policies. Then they can reap hefty premiums thanks to the price increases they typically can command after a big storm. But to benefit from the upside of catastrophes, insurers need to have spare capital or the ability to raise it so they can deliver coverage on new policies they sell.
In 2005, after Hurricane Katrina hit, raising money was relatively easy for insurers to do. Nine property-casualty insurers raised more than $7 billion with secondary offerings in the four months after Katrina, according to data provider Dealogic.
Now, investors may be choosier. Banks and life insurers have raised billions in recent months. But given the fickleness of current capital markets, a property insurer whose stock has just taken a storm-related hit might have to pay dearly in terms of dilution to existing shareholders.
Already, the industry’s resources are depleted due to last year’s storms, Hurricane Gustav and Hurricane Ike. Profit for the industry fell 96% in 2008 and this year swung to a $1.3 billion first-quarter net loss.
All this bodes well for insurers that have maintained deeper pockets — firms that could pay their claims and still have enough cash on hand to sell lots of new policies without needing to raise money.
Among the firms in a good position are Travelers, Chubb, Munich Re and Warren Buffett’s Berkshire Hathaway, a major seller of reinsurance, says Mark Dwelle, an analyst at RBC Capital Markets. “They could ride it out without seeking that replenishment,” he says, adding that smaller firms with less of a track record could have a tougher time raising money if they needed it.
Take Berkshire, for example. Post-Katrina, it was one of many firms able to benefit from the rising prices; in 2006, it sold protection against more storms, and turned an underwriting profit of more than $2 billion when no major hurricanes hit U.S. shores.
Unlike some rivals, Berkshire should be well positioned to do the same in the future.