Gale Force Winds Needed to Re-Inflate Insurance Share Prices

By and | July 16, 2010

Nobody wishes for a natural disaster, but there’s nothing like a big U.S. hurricane to revitalize shares in property and casualty insurers, currently weighed down by persistently weak insurance prices.

Nine analysts polled by Reuters on average said the U.S. hurricane season, which runs from June to November, would need to cause an insured loss of $43 billion to lift prices across the market, giving shares in the sector fresh momentum.

A single windstorm on that scale would be the second most destructive on record after Hurricane Katrina, which left insurers with a $71 billion bill when it devastated New Orleans in September 2005, according to reinsurer Swiss Re.

Insurance prices typically jump after big hurricanes as a welter of claims eats into insurers’ capital, forcing less well-funded players to retrench and freeing those still in the market to charge more.

Shares in the sector generally climb on the prospect of better profit margins, even though soaring claims may wipe out earnings in the near term.

In the event of a major storm this year, key beneficiaries would include Bermuda-based catastrophe specialists Lancashire and Renaissance Re, analysts say.

Reinsurers Munich Re and Swiss Re are also expected to benefit, as their efforts to boost capital reserves while trimming windstorm exposure through catastrophe bonds have left them well-placed to take advantage of rising prices.

PRICE PRESSURE

Shares in insurers and reinsurers have generally held their own against the wider market in the last three years because the sector is seen as recession-resistant, and has low exposure to risky securities at the centre of investor concerns about banks.

But its absolute performance has disappointed, with shares in its bigger players currently trading 20 to 30 percent below net asset values, against a historical average of 1.2 to 1.4 times assets, according to Execution Noble analyst Joy Ferneyhough.

Insurers, mindful of the human cost of natural disasters, stress they take no satisfaction from hurricane-induced upswings.

“Given the destruction a hurricane can cause, you can’t wish for a hurricane. I may be a capitalist, but I have a conscience,” said Bronek Masojada, chief executive of Bermuda-based insurer and reinsurer Hiscox.

But there is no doubt that a turnaround in prices would give the industry a welcome shot in the arm. Barring a brief spike after the last sizeable U.S. hurricane in 2008, rates for virtually all categories of property and casualty insurance have been falling for three years.

The decline reflects stiff competition between insurers holding abundant capital after investors eagerly bankrolled the sector to exploit soaring prices in the wake of Katrina.

Further opportunistic capital-raising by companies who gambled wrongly that stricken U.S. giant AIG would pull out of the market, as well as a historically low level of claims last year, has added to this excess firepower.

“You really need a big event to move the market because balance sheets are very strong at present. There’s a lot of surplus capacity out there,” said Christian Stobbs, an analyst at brokerage KBC Peel Hunt in London.

TURNAROUND HOPES

As it happens, the 2010 hurricane season is shaping up to be busy. Colorado State University’s respected team of forecasters reckon there is a 76 percent chance of a major hurricane hitting the U.S. coastline by the autumn.

Moreover, bigger than usual losses in the first half of this year have already absorbed some of the industry’s excess capital. Munich Re reckons insurers took a $70 billion hit from natural disasters including the Chilean earthquake in the six months to June, outstripping the total for all of 2009.

However, some sector-watchers caution that concerns over insurers’ dwindling investment returns as financial markets falter will continue to weigh on their shares, limiting any hurricane-related gains.

There is a risk also that the hurricane season proves merely big enough to inflict sizeable insured losses without convincingly bolstering prices, prolonging the sector’s spell in the doldrums.

“Probably the most likely storm scenario is one which is slightly worse than average, say around the $10 billion level,” said Collins Stewart analyst Ben Cohen.

“That would be large enough that you would to see some material cuts to earnings forecasts, but not really big enough to change the environment for industry pricing.”

(Editing by Sitaraman Shankar)

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