-- Q: If the number of natural catastrophes increases, won't that hurt the earnings of insurance companies and their stocks?
A: Tsunami in Japan. Drought in Texas. Floods in Pennsylvania. Hurricane and earthquake in New York. The news has been filled with examples of extreme weather that often are accompanied with the risk of property damage.
Property damage is one of the dirtiest terms in the insurance industry. Insurance companies' earnings are powered by collecting premiums and, conversely, hurt by paying out claims. If there's an increase in natural disasters that cause property damage that exceeds estimates, that can create a drag on earnings. Furthermore, if catastrophes are expected to be more frequent in the future, insurance companies must either increase their reserves for claims, which hit earnings, or try to increase premiums.
To your question, does the rash of natural disasters potentially hit the earnings of insurers? On a short-term basis, the answer is yes. Analysts are accessing and measuring the estimated damage from all the events during the third-quarter and will likely make adjustments. Since the third quarter is a busy month for hurricanes, analysts will look at the total hit through September and tweak their forecasts, says Meyer Shields of Stifel Nicolaus. "September is not over," he says. "We expect (the hit from the disasters) to show up, but it's too early to" create a specific estimate, he says.
Longer term, some investors might wonder if insurance companies' earnings might be hit by changes in the planet's climate. Earth is warming up. I'll defer the debate over reasons why the climate might be changing to discussion on the science. And if the earth does heat up, there are some who expect more storms and other potential events that could damage property. But so far, Shields says, there are too many unknowns before he can estimate how any changes in the climate could hurt insurers' earnings. "In any individual year, it's still a random event," he says.
Currently, he is more focused on the short term and the risk of more catastrophic events. "We could easily be seeing more events coming down the pike," he says.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at firstname.lastname@example.org. Follow Matt on Twitter at: twitter.com/mattkrantz