Gauging the Impact of Tornadoes on Hartford Financial
This year is set to go down in the US history as one of the most destructive tornado seasons on record with more than 1,400 tornadoes having hit the country in the first five months of 2011 causing more than 515 casualties and billions of dollars of insured property damage. [1] We attempt to get a rough estimate of losses which the property & casualty insurance companies like the Hartford Financial (NYSE:HIG) is expected to bear. Hartford Financial competes with insurance companies like AIG (NYSE:AIG), MetLife (NYSE:MET) and Prudential (NYSE:PRU).
We have a price estimate of $23.68 on The Hartford’s stock price which is about 5% below the current market price.
Thunderstorms and tornadoes typically account for the largest share of insured losses from natural disasters ahead of winter storms, floods, earthquakes and tropical cyclones. For instance, in 2010, thunderstorms and tornadoes caused $9.5 billion in insured losses while winter storms, floods, earthquakes and tropical cyclones accounted for $2.6 billion, $1.1 billion, $128 million and $120 million respectively. [1]
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While the actual amount of insured losses in 2011 due to tornadoes is yet to come, catastrophe modelling firm EQECAT has released an early estimate of insured losses and expects it to be in the range of $2-5 billion. [2] AIR Worldwide suggests that the nature of recent tornadoes along with their geographical concentration is similar to 2003 outbreak which resulted in $3.2 billion losses at the time. [3]
The Hartford’s share of the US property & casualty insurance market was about 2.4% in 2010. Assuming that the insurance companies will bear losses according to their respective market share, The Hartford’s losses could be anywhere between $50 million to $120 million. This additional burden will be reflected in the lower operating margin for the property & casualty insurance division in 2011 which will decline to 4-8% from its current level of just over 12%.
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Notes:- Tornadoes, Insurance Information Institute [↩] [↩]
- Extreme Weather In US Triggers Large Losses, EQECAT [↩]
- Southern US Severe Thunderstorms, AIR Worldwide [↩]