Effect of hurricane katrina on insurance industry stock prices
This study tests the efficient market theory by measuring the effects of Hurricane Katrina, one of the most deadly and destructive natural disasters to occur in the United States, on stock prices in insurance industry. It hypothesizes that insurance providers who offer services in the areas affected by Hurricane Katrina should incur a loss in the market-price of their stock following the natural disaster. This event study analyzed fifteen publicly-traded major insurance providers and the risk-adjusted rate of return on their stock before and after the date of dissipation of the hurricane, observed as August 30th, 2005. Results show stock returns, although
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Initially, nearly two dozen insurers were placed on a “watch” list by rating agencies in order to get a clearer observation of the impact Katrina would have on their capital adequacy. It was observed that Katrina would be more a major earnings loss, rather than a capital deficit (Towers Perrin). Insurers are typically well-prepared for severe events such as hurricanes and flooding. Due to positive economic market conditions, many insurance companies have built a surplus of capital from policyholder premiums. According to insurance-rating agency A.M. Best, most rated companies will be able to meet their commitments, through a combination of capital surplus and reinsurance, and only a few individual companies’ ratings may be lowered (King). Allstate, one company in this study’s sample, was placed on CreditWatch because of the company’s lack of reinsurance protection in Louisiana, Mississippi and Alabama (Ryst). The economy as a whole was affected immediately following Katrina. The S&P’s research department analysts downgraded their outlook on the global reinsurance industry from stable to negative, which was a result of the uncertainties resulting from the effects of the hurricane (Ryst).
The study sample includes fifteen insurancecompanies who provide services in any of the areas affected by Hurricane Katrina. These fifteen insuranceproviders, due to the large amount of insurance claims resulting from Hurricane Katrina, should see a decline in