Given the recent floods in the UK, Insurance firms will have to pay large amounts of money to fix many infrastructures & houses. Does this fact make it likely for insurance firms shares to drop? If not, why?
A fine post prometeo. Interesting questions. Well, I don't have the answer, but I am happy to offer some suggestions.
Firstly, the damage is most likely built into the price.* If figures are released which shows that the liability the firms will incur is greater than what the market expects, share prices will drop to reflect that. There may be some merit in the suggestion that new buyers will be less eager to take up these prices due to uncertainty about the future. In reality, insurance companies profit because they make enough to compensate for these risks, and the actuarial tables add up. Also, most of their exposure is hedged through reinsurance. Notwithstanding that, a major insurer faced serious financial difficulties after a court ruled they had to make 2 full payouts in respect of the damage caused by 9/11, effectively doubling the exposure of the insurance firm. Also, the great Berkshire Hathaway recorded a loss (if I recall correctly) due to its reinsurance exposure in 2001.
Interesting points - I hope someone more knowledgeable than me weighs in here, but I hope my comments are useful meanwhile.
if you want to trade this, perhaps go long on a broader instrument like the FTSE and short on a few insurance firms you know are exposed. This should limit your market risk I think.
Cheers
* - If you have ever read
Reminiscences of a Stock Operator, you will no doubt remember there was some natural disaster, the markets didn't price the costs in to the manufacturing and insurance industries affected, and Livermore shorted due to this anomaly. The prices came off, and Livermore cleaned up....
