Why Chubb, Progressive and Kinsale Capital insurance stocks tumbled today

Shares of insurance shares Chubb (CB -4.62%), Progressive (PGR -3.85%)and Kinsale Capital (KNSL -7.12%) fell sharply today, down 4.4%, 4.1% and 8.1%, respectively, as of 3pm ET.

The overall reduction in insurance stocks is likely due to Hurricane Milton, which today strengthened into a Category 5 hurricane as it approaches the west coast of Florida. So the insurance names have decreased in proportion to their exposure to the Florida and Gulf Coast property insurance market.

Milton goes down just as the region recovers from Helene

As of Monday’s latest update at noon, Hurricane Milton had just strengthened to a Category 5 hurricane while over the Gulf of Mexico, thanks to record ocean temperatures. While forecasters expect Milton to weaken to a Category 3 or 4 before making landfall, it is also expected to grow to a larger size, spreading more damage over a wider area.

Strong winds, rainfall, flooding and rip currents could cause much property damage in the coming days in Florida — a region that was battered by Hurricane Helene just 10 days ago. Judging by the reaction in the insurance industry today, it appears that investors are assessing that Milton could be even more damaging to Florida, a heavily populated state, than Helene was.

Chubb and Progressive are known as the top brands in home and auto insurance, respectively, although Progressive also writes homeowner’s insurance in Florida. Notably, Progressive has made the decision to stop writing new policies in Florida in 2022 due to the impact of increasingly severe storms due to climate change. The company also did not renew about 100,000 existing policies last year, although the company has expressed its intention to cover at least 200,000 homes across the state.

Kinsale, meanwhile, is a newer specialty insurer founded in 2009 that focuses on specialty surplus and excess (E&S) lines. E&S insurance covers lines that standard insurers will not cover. While Kinsale has underwritten well and generated very high returns in recent years, hedging these high-risk lines can be, well, risky. Kinsale cover includes things like mobile homes on the Gulf Coast, which is covered by Aspera, Kinsale’s hard to insure mobile home division. In the last quarter, Kinsale’s largest exposure is commercial property at over 26% of gross written premium. The fourth largest exposure is construction insurance. Therefore, those two exposures on the west coast of Florida could lead to large catastrophe losses if Milton is as severe as some fear.

Milton isn’t scheduled to hit until Wednesday, but it looks like investors are bracing for quite a catastrophe and losses for insurers exposed to Florida properties, whether residential, commercial or specialty mobile homes.

Image source: Getty Images.

Insurance companies: Never more profitable, never riskier

These three names are among the most highly regarded insurance brands out there, so seeing each sell as much as they are today is a reminder of the risks for anyone investing in the insurance space. While insurance stocks may look cheap from a price-to-earnings or price-to-book perspective, keep in mind that just one major disaster or really bad hurricane season can derail a quarter or an entire year’s worth of earnings.

That said, in the face of intensifying storms and inflation, insurers have been able to raise prices significantly in recent years while limiting contract exposure, leading to one of the toughest markets in living memory recent. So the price increases of recent years could allow these companies to generate profits even in the midst of a severe hurricane and a larger hurricane season. It will be interesting to see how these companies fare in the fourth quarter and year after all is said and done.

It can also be an opportunity for investors. After all, in the wake of major catastrophes, insurers tend to withdraw their exposure, competition leaves, and prices rise. So it might be time to line up some of your favorite underwriters for potential purchases if there’s another material selloff in these stocks.