Update: Hurricane Sandy’s Impact on P&C Stocks
Now that two weeks have passed since Hurricane Sandy, I thought it would be helpful to update the regression analysis I shared a few weeks back plotting Hurricane Sandy exposures (based on premiums written in NY & NJ) versus stock performance.
As the graph below demonstrates, the impact to P&C insurer’s stocks has been generally been in-line with exposures (excluding the relative underperformance of $UFCS). For purposes of the regression, I excluded $MCY, $HMN and $EMCI given they have no published exposure to NY or NJ (based on a review of the companies SEC filings).
With respect to UFCS’s underperformance, they provided an estimate of Hurricane Sandy’s losses in their 3rd quarter earnings release in early November (the first estimate provided by a company that I am aware of):
“At this point, we expect both direct and assumed losses to impact our fourth quarter results. We estimate after-tax net losses of $13-19.5 million, with an impact of $0.51 to $0.76 cents per share. On our assumed book of business, the insurance we provide other insurance companies, we estimate after-tax losses of $2-3 million, with an impact of $0.08 to $0.12 cents per share.”
While combined losses of $0.88 per share (at the upper end of the range) are not inconsequential, they represent ~3% of UFCS’s book value per share – an amount that one would assume would be manageable. Adjusted for this estimate, book value per share as of Sept 30, 2012 would have still been $28.78. Given Friday’s closing price of $19.70, UFCS trades at a 0.68x P/BV and a FY13 P/E of 10.1x while also providing an attractive 3.0% dividend yield (nearly double the yield on the 10Y Treasury).
Further for those who follow technicals, UFCS recently fell below its lower support level. Friday the stock rebounded 5% on 1.5x the average trading volume suggesting an inflection point in the stock’s momentum may have been reached. Historically UFCS has experienced high price volatility given its a thinly traded small cap.
One possible explanation for UFCS’s recent underperformance relative to peers may be the increase in loss severity in the 3rd quarter in their Other Liability and Workers Compensation lines (excerpt from their 3rd quarter earnings release):
“Non-catastrophe loss severity had been declining in the first two quarters of 2012. In the third quarter, however, we experienced an increase in the number and severity of Other Liability and Workers’ Compensation losses. These losses, while severe, were not severe enough to exceed our retention limits and thus recover on our reinsurance contracts. As a result, they caused an increase in the GAAP combined ratio from 96.3% in the second quarter to 102.5% in the third quarter of 2012. Our overall non-catastrophe loss severity for the year remains lower than 2011, but we will continue to closely monitor the situation.”
Given the long tail nature of these lines (i.e., the claims can drag on for years as opposed to property damage claims which are short tail claims in that they are generally settled within months of the event), increases in severity and frequency can have an unfavorable impact on reserves set aside for prior claims. Unfortunately, it is too early to tell – based on publicly available information – if this is the formation of a new trend that would necessicate a strengthing of the reserves or typical quarterly volatility.
Was UFCS unduly punished by being the first insurer to provide an estimate of Hurricane Sandy losses and/or a slight uptick in non-catastrophe loss severity? I will leave that decision to your judgement.
Disclosure: I currently have no positions in $UFCS as of this posting but may acquire positions in the future. I have held positions in $UFCS in the past.