Differential Analysis of the Impact Catastrophic Loss has on Publicity Traded Property/Casualty Insurers

The purpose of this paper is to examine the capital market effect major catastrophes have on property/casualty insurers operating in the United States. It is widely accepted that capital markets are semi-strong efficient, i.e., prices of securities incorporate all currently available public information. A number of studies using event methodologies have examined capital market reaction to firm announcements of financial bankruptcy. These investigations have focused primarily in stock price reaction to single firm announcement effects. The present study seeks to measure capital market reaction to the announcement of catastrophic natural disasters for publicly traded property/casualty companies operating in the USA A one-factor market model using CRSP data covering the period from 1970 to 1992 is used to compute the vector of excess (abnormal) returns for the period before and after major natural disasters. Capital market reaction to adverse natural disasters may impact the ability of property/casualty insurers to tap equity markets as a source of funding. Financial risk exposure to the announcement effect from natural disasters may be hedged using stock-index futures over period when such catastrophic events are likely to occur. Financial risk exposure tends to vary with the distribution and line of business for publicly traded NYSE listed property/casualty insurers across the USA. Reinsurance Research