Reinsurance Stocks Underperform During Hurricane Season: What's The Play?

With 2015’s hurricane season now in full swing, Citi Research analyst Andrius Budnikas penned a new report on hurricane season’s effect on the reinsurance business. U.S. hurricanes have historically caused some of the largest financial losses to the reinsurance business, and reinsurance stocks typically underperform throughout the hurricane season.

Risk level
Budnikas explains that reinsurance stocks have historically lagged in both absolute terms and versus the insurance sector throughout hurricane season. However, he believes that both American and European reinsurers’ current levels of risk and exposure do not warrant solvency or ordinary dividend concerns, even in the event of a catastrophic storm.

Pricing levels
According to Budnikas, the global reinsurance market is currently stable enough that even a catastrophic storm would have a minimal effect on pricing. He cites both the increasing volume and fungibility of the market and the improvement of modelling methods as the major reasons why reinsurers are now better-prepared for surprises than they have been in years past.

“We expect that even in the event of a major natural catastrophe, it is possible that the impact on pricing will remain localized, with little or no global benefit, unlike previous loss events,” Budnikas explains. He adds that the only true risk of extreme pricing volatility remains in un-modelled catastrophic events, such as 9/11.

Outlook
Four different weather agencies are predicting that there is about a 70 percent probability that this year’s hurricane season will be “well below average” in terms of the number and the severity of storms.

Citi’s preferred reinsurance stock is European-listed Swiss Re. However, Americans that are looking for reinsurance names to play should consider hurricane-sensitive names such as Everest Re Group Ltd RE, RenaissanceRe Holdings Ltd RNR and PartnerRe Ltd PRE.