With the increase in fires and severe weather, so is the demand for homeowners insurance

The devastating fires in Maui are a stark reminder of the increased risks homeowners face from disasters such as wildfires, storms and floods.

Dry conditions, low humidity and high winds from a hurricane battering hundreds of miles south of Hawaii helped fuel the fires that have killed at least 80 people and devastated the historic city of Lahaina. Hawaii Governor Josh Green said the wildfire was “probably the largest natural disaster in the history of the state of Hawaii.”

Insurance broker

help

(Stock ticker: AON) on Friday said the devastation “is likely to push economic and insured losses into the hundreds of millions” of dollars but warned that “given that this situation continues, losses may continue to increase.” The Pacific Disaster Center and Federal Emergency Management Agency have estimated the rebuilding cost at $5.52 billion, according to A Facebook share on Saturday by the County of Maui.

As severe weather and natural disasters further damage homes and properties, people are increasingly seeking protection from potential losses. That means brisk business for insurance companies — and opportunities for investors.

According to Adam Clauber, an analyst at William Blair, a “huge opportunity” is emerging in the homeowners’ insurance sector, which will also present “significant” investment opportunities.

However, the wildfires on Maui come at a time when the insurance sector is tanking: People who live in areas prone to fires and hurricanes pay more for coverage but get less protection because insurance companies raise premiums and deductibles and limit the amount they will cover—or limit coverage altogether.

While most natural events are covered by homeowners insurance, “events that affect a smaller scale of geographic areas such as earthquakes, wildfires, and floods require separate policies,” Klauber said in a statement. Research note Published Friday.

However, this should not preclude the need for insurance to cover other risks.

“The demand for homeowners insurance has arguably never been higher than in the current macro environment, with homeownership rates, property valuations and risk levels all high,” Klopper said. “As a result, premium growth, which had remained relatively flat in the wake of the housing crisis, has risen significantly.”

Klauber said the industry’s stellar growth has remained in the 6% to 9% range over the past three years compared to the typical 3% to 5% range, and could increase more than 10% in the future.

He sees “a strong growth opportunity in an already huge market”. Klauber said premium revenue is poised to expand from $130 billion today to $200 billion in the next five years. This is good news for airlines.

Klauber started covering two “high-tech” home insurance companies,

HCI Group

(HCI) f

Hippo Holdings

(HIPO), both of which carry a market performance rating.

While both companies are good growth stories and should benefit from expansion into the homeowners’ insurance segment, the rating reflects the fact that William Blair needs to see a more consistent earnings view “before we can be confident in the stock’s ability to outperform,” the note said. .

HCI shares have risen 48% this year. Over the past 12 months, they’ve gained 1.5%. Hippo shareholders weren’t so lucky: The stock is down nearly 30% this year and more than 60% over the past year. Last September, the digital insurer laid off about 10% of its workforce as underwriting losses mounted.

One element that helps make HCI stand out in the crowd is its use of technology, which is becoming increasingly important as insurers try to assess and price the risks associated with severe weather events.

“HCI is an example of a service provider in the broader home coverage space that has used analytics to increase the number of data points used in the underwriting process to achieve a more detailed assessment of risk,” said Klauber.

He said many other companies will benefit from the growing opportunity in the homeowner market, including higher-rated stocks

Palomar

(PLMR) and

Crawford & Co.

(CRD.B).

The insurance industry is remarkably slow to change, Klopper said, but is relatively new entrants, such as the specialty insurance company

Palomar
And

It has an edge when it comes to the latest technology. Founded in 2014, the company provides insurance against earthquakes, hurricanes, and floods.

“Palomar has a modern processing technology stack, so it’s better able to take the updated analytics and implement it into the insurance product,” said Kluber. Barron. “They’re mating that new technology with a new analytics platform to better take risks.”

He added: “A good part of what they do is they geo-code risk at the address level. So they look underground – so one house can be built on rock, another on sand – so they know to charge a much different rate. The industry doesn’t have This ability.”

Palomar also maintained a healthy combined ratio — a term used in the industry to assess an insurance company’s profitability. A ratio less than 100% indicates that the company is making an underwriting profit, while a ratio above 100% means it is paying out more money in claims than it is getting in premiums.

“(Palomar’s) combined is 80%, where the industry is more like 95-100, despite being in relatively risky lines of business, where you’ve seen volatile weather, experienced hurricanes, all of those things, and it’s still one of the most profitable companies in the world.” industry,” Klopper said.

Palomar shares have been on a rollercoaster ride: They’re up 26% this year, but they’re down 27% over the past 12 months.

Another company poised to benefit from premium growth is a claims management company

Crawford

Note said.

“Crawford provides state-of-the-art claims technology solutions to insurers,” said Clauber. “As the level of complex weather claims rises, Crawford should continue to see increased demand for its products.”

Write to Lauren Foster at lauren.foster@barrons.com

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