The stocks of Florida-based homeowners insurance underwriters often experience some turbulence when tropical cyclones threaten the Sunshine State, but generally bounce back strongly when the storms pass through.
Universal Insurance Holdings Inc., FedNat Holding Co. and Heritage Insurance Holdings Inc. tend to gain ground and sometimes even outperform the S&P 500 when storms make impact and in the ensuing weeks, according to an S&P Global Market Intelligence analysis covering hurricanes and tropical storms that have either brushed or made landfall on Florida since 2004.
The typical pattern starts with "events-driven" investors, such as hedge funds, selling shares of Florida homeowners insurers when hurricanes are days away from impact as they mull the exposure of those companies, Keefe Bruyette & Woods analyst Christopher Campbell said. Those investors may not dig that deeply into reinsurance programs or understand the hedges some Florida-based insurers have in their business models to offset negative retentions, the analyst said in an interview.
Florida homeowners insurers typically have "very strong" reinsurance retention, usually between $20 million and $40 million, Campbell said.
FedNat and Heritage also wholly or partially own claims management companies that adjudicate claims for reinsurers. The worse the catastrophe losses, the more claims adjusting income they receive. That is usually netted against their core loss ratios the year after each event, the KBW analyst said.
Shares normalize when investors who are "a little more knowledgeable" come in, according to Campbell, which combined with weather developments lead to a "relief rally."
"[Hurricane] Dorian is a perfect example," Campbell said. "It looked like it was coming straight for Florida and then the storm's path changed, which led to the relief rally. You see that a lot."
One outlier was Hurricane Michael in 2018. Shares of Universal Insurance and FedNat gained a week before the storm came ashore. However, Michael strengthened rapidly before making landfall on the panhandle, leading to drops for all three insurers on the day of impact and through the next week.

