Insurers: In Good Hands?

09/16/2005 12:00 am EST

Focus:

Charles Carlson

Editor, DRIP Investor

"There are times such as this when you simply feel lost, and many investors are left wondering what to do with their portfolios," says Chuck Carlson. "What I've been saying, for the most part, is do nothing." Here, he explains his rationale for patience.

"Yes, it is not unusual for some stocks to take a bit of a beating after disasters such as Katrina. But history has shown that stocks generally come roaring back within the six months following such disasters. Even some of the hardest hit sectors have shown a tendency to rebound in a fairly short period of time. Which brings me to the insurance stocks.

"In recent months, I have been beating the drum for insurance stocks, and these stocks have responded by posting nice gains. In recent days, however, insurance stocks have taken a dip as Wall Street tries to assess the damages of Katrina. Admittedly, it is hard to be bullish on the insurance sector when television is blasting images into our living rooms 24/7 about the destruction that has been left in the wake of Katrina. Still, I remain reasonably upbeat on the quality stocks in the insurance group, for the following reasons:

  • Disasters have a tendency to push the weaker insurance players out of business, leaving stronger players to pick up market share.
  • Although it is still early to assess the full scope of the damages, insurance stocks have lived through some pretty nasty disasters in the past and have gotten smarter in terms of risk management as a result of those disasters.
  • Big disasters, such as Katrina, give insurance companies cover to boost prices.
  • Katrina may be the final straw that causes Congress to implement some sort of catastrophic insurance program. And that would certainly be good news for insurance stocks.

"Now, I'm not saying that insurance stocks will be among the market leaders for the remainder of this year. Still, if you are holding quality insurance stocks in your portfolio, and your weighting in the insurance sector is manageable (say, less than 10% of your portfolio), I would hold the stocks and look for opportunities to add to positions if the recent selling in the group persists.

"Property-and-casualty insurers, such as Allstate (ALL NYSE), Hartford Financial Services Group (HIG NYSE), and to a lesser extent Progressive (PGR NYSE) , stand to suffer large losses from Hurricane Katrina, which could prove to be one of the costliest storms in US history. The insurance industry faces as much as $26 billion in claims in Louisiana and other Gulf Coast states hit by the storm.

"These insurance firms have not yet estimated losses. However, these insurers have large loss reserves and should be able to handle any claims without hurting long-term prospects. In particular, we like Allstate, which is among the largest property-and-casualty insurance companies operating in the southern states. The stock has come off its 52-week high of $63 and I see good support in the $50 range."

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