The insurance, airline, and financial services industries are trading down today in the wake of the recent attacks on the Pentagon and World Trade Center. The good news is that many of the challenges facing companies in those sectors are only short-term. Business at most firms in those industries will recover as the economy does.
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Insurance, airline, and financial services stocks are trading down today in the wake of last week's attacks on the Pentagon and World Trade Center. The good news is that many of the challenges facing companies in those sectors are only short-term. The lost business the airlines might face, and the losses insurance companies could endure, will hurt results in the near term, but the U.S. economy and the markets won't change permanently as a result of the attacks. With many stocks getting whacked in trading today, however, let's look more closely at these three sectors. Insurance Those that stand to be most seriously impacted include American International Group (NYSE: AIG), which has already estimated losses of $500 million, Chubb (NYSE: CB), which predicts losses of about $100 million to $200 million for property damage claims alone, and Berkshire Hathaway (NYSE: BRK.A), Warren Buffet's holding company. Berkshire, which owns reinsurer General Re, expects to take 3% to 5% of the overall insurance industry loss from the event. (Insurers use reinsurers to protect themselves from potential losses.) The insurance group has typically sold off following catastrophes, but usually rebounds as companies -- particularly in the reinsurance industry -- raise rates (i.e. prices) to compensate for the losses they've realized. American International Group, for example, is one company that could benefit the most from industry-wide price hikes because its margins are already higher than the rest of the industry. Airlines Industry estimates predict losses greater than $10 billion as a result of the recent attacks, and the hits will most likely keep tumbling in. UAL (NYSE: UAL), which owns United Airlines, and AMR (NYSE: AMR), which own American Airlines, will surely be the target of lawsuits on behalf of the victims' families. At the request of the two companies, Congress is drafting legislation to provide some protection from possible lawsuits. Fewer people are likely to fly as safety concerns loom. Fewer flights, meanwhile, will probably be offered because of increased security measures, which are sure to add additional expenses. That -- combined with the fact that the industry is already a low-margin business with sizeable capital requirements that have led to significant debt and interest burdens -- is sufficient cause for investors to be careful when considering entering this sector. Financial services American Express (NYSE: AXP), Lehman Brothers (NYSE: LEH), and Merrill Lynch (NYSE: MER) could experience some operational problems because their headquarters were located across the street from the World Trade Center. (Real estate investment trusts with heavy exposure in Manhattan will also be worth watching given the widespread property damage and the need for new facilities.) Citigroup (NYSE: C), which offers insurance through its Travelers unit, could also see some losses. The financial services, insurance, and airline industries will all suffer in the near term as a result of the attacks. Other sectors, such as consumer goods and big pharma, however, might benefit as investors jump into stocks that thrive regardless of economic change. Nevertheless, the long-term outlook for all three aforementioned sectors hasn't changed significantly. Stocks unfairly taken down because of short-term concerns could create some opportunities for investors. Mike Trigg spends his days offering readers what Gordon Gekko called "the most valuable commodity": information. Mike's holdings can be viewed in his personal profile. The Motley Fool is investors writing for investors.
While the total insurance losses from the World Trade Center attack won't be known for some time, the property casualty and reinsurance industries will likely feel the brunt. Hurricane Andrew generated $17 billion in claims in 1992, and the recent attacks could surpass that figure. Investors can find some comfort in the knowledge that the insurance industry is well-financed, with surplus premiums of $318 billion at the end of last year, according to UBS Warburg.
The airline industry will also suffer greatly. Unlike the insurance group, however, the sector was already posting large losses because of difficult economic conditions -- which have cut into travel spending -- rising fuel costs, and thorny labor issues. In fact, with the exception of Southwest Airlines (NYSE: LUV), a superior company in a tough industry because of its low-cost provider model, any investment in this sector carries a significant amount of risk.
The financial services industry, like the airlines, was also suffering because of difficult economic conditions. The trading stoppage, the longest since World War I, will exacerbate the losses due to declining trading volumes and investment banking activity. The possibility of weakening consumer confidence could also dent hope for an economic recovery, making the outlooks for these companies -- which typically go as the economy goes -- unclear.
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