Why Insurance Stocks Chubb, Progressive, and Kinsale Capital Plunged Today

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

The across-the-board downdraft for insurance stocks is likely due to Hurricane Milton, which was reported to strengthen into a Category 5 hurricane today as it approaches Florida’s west coast. So, insurance names fell in proportion to their exposure to the property insurance market in Florida and the Gulf coast.

Milton bears down just as the region recovers from Helene

As of the most recent update midday Monday, Hurricane Milton just strengthened into a Category 5 hurricane while over the Gulf of Mexico, thanks to record-warm ocean temperatures. While forecasters expect Milton to weaken into a Category 3 or 4 before it makes landfall, it is also expected to grow to a larger size, spreading more damage over a wider area.

Heavy winds, rainfall, flooding, and rip currents could lead to a lot of damage to property across Florida in the incoming days — a region that was just hit by Hurricane Helene just 10 days ago. Judging from the reaction in the insurance sector today, it appears investors are assessing Milton may be even more damaging to Florida, a highly populated state, than Helene was.

Chubb and Progressive are known as the premier brands in property insurance and car insurance, respectively, although Progressive also writes homeowner’s insurance in Florida. Of note, Progressive made a decision to stop writing new policies in Florida in 2022, due to the impacts of increasingly severe storms due to climate change. The company also didn’t renew some 100,000 existing policies last year, although the company has expressed intentions to cover at least 200,000 homes across the state.

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

Milton isn’t scheduled to make landfall until Wednesday, but it appears investors are preparing for a rather large catastrophe and losses for insurers exposed to Florida property, whether residential, commercial, or specialty/mobile homes.

Insurance companies: Never more profitable, never more risk

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

That being said, in the face of increasingly intense storms and inflation, insurers have been able to raise prices significantly over the past few years while limiting exposure in contracts, leading to one of the “hardest” markets in recent memory. So, the past few years’ price increases may enable these companies to still generate profits even in the midst of a severe hurricane and 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 may also be an opportunity for investors. After all, following bad catastrophes, insurers tend to pull back their exposure, competition leaves, and prices increase. So it may be time to line up some of your favorite insurers for potential buys if there is a further material sell-off in these stocks.

Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Kinsale Capital Group and Progressive. The Motley Fool has a disclosure policy.