NEW YORK - Hurricane season starts June 1, but the best advice for worried clients who own substantial amounts of shares in property insurance companies is to stay put, industry observers say.
"When storms start forming, people often sell their insurer stocks in fear, and that's a mistake," said Cliff Gallant, senior vice president of research for Keefe Bruyette & Woods Inc. in New York. Insurer share prices - even if they decline in the short term because of anticipated or actual hurricanes - almost always bounce back, he added.
"If it's a Category 3 or 4 storm, stock prices of affected insurers will likely drop. But when [premiums go up] as a result, that can send the stocks back up again," said Steven Kauderer, managing director and leader of the insurance industry practice for Mercer Oliver Wyman in New York.
"Insurance stocks often rise due to hurricanes," said Bruce Zaro, chief technical strategist for Delta Global Advisors Inc. of Huntington Beach, Calif. Due to extensive hurricane-related claims, state insurance departments usually approve insurer requests for large premium increases, he said.
"These higher premiums increase earnings, which makes stock prices rise," Mr. Zaro said.
"Consumers know that they have to insure their homes, so they'll pay whatever the market tells them to pay," Mr. Gallant said. "Insurance is all about supply, as the demand is always there."
Media play role
Media frenzy over an impending hurricane can boost insurer stocks as investors bet that substantial insured losses will eventually drive up premiums and insurer profits.
That was among the findings of a study of 30 insurer stocks released last month by economists from Texas Tech University in Lubbock and East Carolina University in Greenville, N.C.
"Markets valued the news [about the hurricane] and responded accordingly," said Bradley T. Ewing, professor of operations management at Texas Tech. "There is a lot of value placed in the media."
Although the stocks may temporarily falter as claims pour in, they can head back up if losses aren't as bad as originally feared, the researchers noted.
Using data gathered from Hurricane Floyd in 1999, the study compared news coverage with insurance stock prices during the 11-day period from the time the storm was classified as a tropical depression to the time the hurricane ended.
The "free advertising" given to the importance of insurance when the media talks about approaching hurricanes can increase stock prices by up to 2% a day, according to Texas Tech finance professor Scott Hein.
"Enough marketing can fuel interest in property-casualty stocks, including during hurricane season," Mr. Kauderer said.
These responses are in line with models of investor behavior in which information is acted on quickly and assimilated into daily price changes, according to Jamie Brown Cruse, an economist with the Center for Natural Hazards Mitigation Research at East Carolina University.
"After a major catastrophe - such as 9/11, in which insurers paid out billions of dollars in claims - can be a great time to buy insurance stocks," Mr. Gallant said. Prices may be low because others are looking to sell their shares, he noted.
Also, the future of the companies that financially survived the catastrophe is especially bright if competitors that weren't as strong failed due to significant losses, Mr. Gallant said. "The companies that survived will have more pricing power," he added.
There are events going on in the insurance industry - such as scandals and investigations - that may indicate that stocks should be sold, observers noted. But weather fears alone shouldn't precipitate sales.
"Never dump insurance stocks because of weather," said Mr. Zaro, who works in Delta's Plymouth, Mass., office. Clients often ask advisers to sell insurer stocks immediately when they hear about a hurricane, he noted.
"However, history shows that share price performance after severe weather is quite good," Mr. Zaro said.
"The insurance industry should be looked at as a long-term investment," Mr. Gallant said. "Warren Buffett has done very well with that philosophy."