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Morningstar | Florence Looks Manageable for Insurers

While Hurricane Florence has created substantial devastation, we think the impact on insurers looks manageable. By the time it made landfall, Florence had been reduced to a Category 1 storm. Given that homeowners policies tend to exclude flooding, which is handled under government programs, the diminished wind speeds (the category rating relates only to wind speed) could help to reduce insurers' losses. An additional factor is that the North Carolina homeowners market is dominated by mutuals, with mutuals holding the top four market share positions. Still, within our coverage, Allstate has by far the most exposure to the North Carolina homeowners market, although we would note that the company's historical avoidance of coastal exposure and its use of reinsurance helped it to weather the flurry of hurricanes last year very well. While Florence is a large storm and its effects will spill out from North Carolina, we think the factors above will limit losses within our coverage, and will maintain our fair value estimates and moat ratings for all the P&C insurers we cover.

In commercial lines, we see Chubb, AIG and Travelers as the most exposed. Travelers, in particular, also has material homeowners exposure, and the combination could magnify losses. While this doesn't affect our long-term view of Travelers, we would note that the stock currently trades at a modest discount to our fair value estimate, and we believe that, among narrow-moat insurers, Travelers is currently the most attractively valued. In our view, the company has been generating returns below its long-term potential because of a string of temporary issues. We expect mean reversion over time, but this could be an additional issue that creates a delay in this process.

AIG remains our favorite name in the space. Following last year's flurry of catastrophes, AIG took a disproportionately high level of losses, and management announced that it would use reinsurance more actively going forward. As such, the current hurricane season could be a test of this new approach. However, we would expect the market to look past catastrophe losses unless they end up being abnormally large, and focus on the company's progress in improving underlying results in commercial lines, which we see as the last obstacle for AIG in generating an acceptable return. We continue to believe that some reversion toward peer results is a reasonable expectation now that the company has a management team with a track record of underwriting success, and that the stock is materially undervalued even if the improvement is modest. For more details please see our Select presentation "Outlining AIG's Path to Mediocrity."