One to Watch Insurers get breath of fresh air as Irma quietens down

What: Hurricane Irma has been downgraded to a category 1 storm and as it passes over Florida initial estimates of the cost of the damage have also been downgraded. Whereas initial fears were that this would be the most costly rebuilding programme in history, it looks like the repair costs estimate from Irma may be around $20-$40 billion mark, which is well within the price range for recent natural disasters. Although the clean-up in Texas after Hurricane Harvey is likely to cost well over $100bn, the fact that Irma didn’t deliver a double blow to the insurance sector has helped the share price of some of the big hitters in global insurance surge at the start of the week: Everest Re, AIG, Zurich, Allianz and Axa have all seen their share prices gap higher on the back of the latest Irma news, with Everest Re leading the way for a more than 5% gain so far today. The London insurers have had more modest gains, Legal & General is up 1% today while Aviva is up 0.5%. The muted response this side of the Atlantic is likely due to the British insurers having less exposure to Florida insurance claims.

How: We believe that US insurers including Everest Re and AIG could continue to benefit from news that Irma is unlikely to be too costly for the insurers. Warren Buffet’s fund, Berkshire Hathaway, has also seen a 1.5% increase today, due to the investment guru’s well known exposure to insurance and reinsurance firms, which is a clear sign that investors are warming to insurers now that the latest hurricane risk has died down. Both companies have had a torrid summer as investors have sold off US insurance shares partly in preparation for hurricane season. Although both Everest Re and AIG have recouped some of last week’s losses, they both remain some way off of their peaks reached in July. At mid-point in trading on Monday, Everest Re is giving back some earlier gains, however, if it can break above the 200-day sma at $239.88 then we could see back to the $250 level, which also corresponds with the 61.8% retracement of the July high to last week’s low, see the chart below.

Obviously if we see further storms brewing in the region then these gains could be used as a selling opportunity. But for now if the weather in the US Southern states manages to calm then we could see AIG play catch up to Everest Re in the short term as AIG’s analysts’ rating is a buy compared with hold for Everest Re.

Chart 1: 

Source: City Index and Bloomberg