Small-cap insurance stocks have taken a beating over the past two quarters as investors have fretted about these companies’ exposure to hurricanes Harvey, Irma and Maria.

Some estimates have put the total value of losses from the hurricane season at over $100 billion, making it one of the most costly disaster seasons in decades. And while it will be some time before the final loss figures are known, companies have already started reserving billions for potential claims.

Berkshire Hathaway’s third-quarter report contained a $2.8 billion provision for losses related to hurricanes Harvey, Irma, and Maria, as well as the earthquakes in Mexico. Meanwhile, AIG reported pre-tax catastrophe losses of about $3 billion in the third quarter mainly related to hurricanes Harvey, Irma and Maria. Swiss Re, the world’s second-largest reinsurer, estimated its claims burden from hurricanes Harvey, Irma and Maria in the United States and from two earthquakes in Mexico at roughly $3.6 billion. Germany’s Munich Re booked losses of €2.7 billion.

However, while the largest insurers have been unable to escape the devastation, small-cap insurers seem to have gotten off lightly.

hurricanes Harvey, Irma and Maria
skeeze / Pixabay

Small-Cap Insurance Stocks Cheap after hurricanes Harvey, Irma and Maria carnage

According to analysis from RBC Capital Markets, “Relative to larger cap companies, combined ratios held up better for small caps with six of the ten companies generating an underwriting profit for the third quarter.” While most of the space did suffer losses, many domestic-focused small caps don’t have significant exposures to the worst hit areas the report goes on to note.

In fact, the exposure for most of these companies was so limited that the group managed to average book value growth of 0.2% during the third quarter, slightly less than the large-cap average increase of 0.9% but still impressive considering the environment. What’s more, as RBC’s analysts note “most small caps don’t have large equity exposure” and “many small caps have smaller relative exposures to alternative investments.”

Leading the pack with book value growth of 2.1% year-on-year is Horace Mann Educators and Kemper Corp thanks mainly to an improvement in combined ratios as rate increases offset higher claims:

“Given the extent of the industrywide cat losses in the quarter, underwriting margins were collectively under a great deal of pressure for the quarter. Despite one of the worst quarters ever for the P&C insurance industry, three companies (Horace Mann, Infinity, and Kemper) managed to produce y/y combined ratio improvements. In several cases, the magnitude of cat losses (and weaker margins in general) caused significant y/y deterioration in underwriting margins. In particular, Argo Group and Navigators saw more than 25-point y/y increases in their combined ratios.”

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