Insurance Carriers Breaking Down Ahead of Irma

The SPDR S&P Insurance ETF (KIE) broke three-month support and headed into a tailspin on Monday in anticipation of the second major hurricane hitting U.S. soil in less than two weeks. The historic ferocity of Hurricane Harvey and Hurricane Irma has unnerved institutions with exposure to this blue-chip sector, raising concerns that reinsurance layers will not save insurance carriers from unprecedented losses.

Many fund components avoided catastrophic losses in the wake of Harvey because their contracts exclude flood damage, which requires participation in the federally insured program. Ominously, Irma winds are currently spinning at near historic levels, exposing insurance contracts to much higher losses. In addition, high water levels in the latest storm could add to an estimated half million insured vehicles that need replacement after the Gulf Coast disaster. (For more, see: Hurricane Harvey Could Cause Havoc for Insurance Companies.)

Insurance carriers control risk in the same way as individuals and corporations, i.e. buying protection against serious financial losses. Reinsurance contracts serve this purpose, providing reimbursement when insurance carriers get hit with catastrophic events. However, many insurance companies buy insufficient coverage, rolling the dice with Mother Nature and other destructive forces that can destroy profitability.

The SPDR S&P Insurance ETF (KIE) completed a round trip into the 2007 high in 2014 and broke out, but momentum failed to develop until November 2016, when the fund took off in a powerful trend advance. That buying impulse stalled near $90 in March 2017, giving way to a basing pattern that generated a secondary breakout in July. KIE posted an all-time high at $92.40 on Aug. 8 before turning lower into the end of the month, and it just broke down in a wide-range sell-off.

The decline has already reached the 200-day exponential moving average (EMA), with the price likely to hover around that level while meteorologists track Irma’s destructive path in coming days. Technically speaking, bounces to $89 or so can now be sold short in anticipation of an eventual breakdown through second quarter range support centered at $83.50. However, traders should keep in mind that many carriers pay higher-than-average dividends, which become the short seller’s responsibility on the ex-dividend date. (See also: KIE: SPDR S&P Insurance ETF.)

Dow component The Travelers Companies, Inc. (TRV) broke out above 12-year resistance in the mid-$60s in 2012 and entered a strong uptrend that eased into a rising channel in 2015. It reversed at channel resistance near $130 in mid-August and failed a six-month breakout above $125, which now marks new resistance. The decline accelerated this week, dumping the blue-chip property-casualty insurer to a nine-month low.

Bungee jumps into channel support in 2015 and 2016 could signal a short-term buying opportunity if the current swoon reaches the $107 to $110 price zone because those V-shaped patterns predict another strong bounce that could translate into opportune profits. However, traders should not stick with the stock for too long after a bounce because technical damage in the sector could presage the start of a longer-term downtrend. (For more, see: Top 10 Insurance Companies by the Metrics.)

RenaissanceRe Holdings Ltd. (RNR) has benefited in recent years from generally benign weather with few major catastrophes, other than seasonal tornado outbreaks. The stock has been grinding higher in a steady uptrend since breaking out above the 2007 high in 2012, more than doubling in price since that time. The stock topped out at $150 in March 2017, sold off to $134 in May and failed a July breakout attempt.

It has now completed a double top breakdown, signaling a downtrend that could eventually reach the 200-week EMA, currently rising from $114. On-balance volume (OBV) has been flashing warning signs for the past six months and has now dropped to the lowest low since mid-2016. This tells us that institutions have abandoned ship well in advance of this summer’s historic weather outbreaks. (See also: RenaissanceRe Q2 Earnings Beat Estimates, Rise Y/Y.)

The Bottom Line

Property-casualty insurance carriers and reinsurers are selling off ahead of Hurricane Irma’s U.S. landfall, already battered by Hurricane Harvey’s historic flooding. Mother Nature’s one-two punch could be devastating to carriers with the weakest balance sheets and greatest coastal exposure. (For additional reading, check out: What Hurricane Harvey Means for the Economy and Your Portfolio.)

<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>

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