As hurricane forecasters anticipate an active 2024 hurricane season, analysts at BofA Securities have said that European and London market re/insurers are very well placed to deal with the potential fallout.
While the majority of Atlantic hurricane activity typically occurs between mid-August and mid-October, insurers and reinsurers were put on high alert as hurricane Beryl became the earliest Category 5 storm ever recorded.
Although the storm made three landfalls at different strengths, current insurance industry loss estimates range from $2.5 billion to $4.5 billion, and so are expected to be manageable for the industry.
Of course, the arrival of such a strong storm so early in the season does not necessarily mean that others will follow, but given the warmer sea surface temperatures and the outlook from various forecasters, it has served as a warning sign for the risk transfer industry and market participants will be preparing for an active period.
“This has understandably caused nervousness amongst investors, which we believe is generally unfounded. We believe the sector is well-placed to deal with a potentially active hurricane season, with significant underlying earnings capacity and excessively strong capitalisation to help absorb any above-normal large loss shocks,” say analysts at BofA Securities.
Interestingly, analysts also state that another quiet hurricane season would also not necessarily be welcomed by the market, as this would put additional pressure on what’s now a stable pricing backdrop.
“Current margins in reinsurance and commercial insurance remain very attractive, and we think should be supported by ongoing discipline,” continue analysts.
Since 2017, $100 billion or more of annual insured losses from natural catastrophes has become the new norm, but given the underlying earnings strength of the sector, which analysts feel has been under appreciated, losses at this level would still be an earnings event rather than a capital one.
“To contextualise this, it would be almost equivalent to two Hurricane Ian’s (which cost the industry US$60bn back in 2022) on top of a ‘normal’ hurricane season load. This stress would still remain an earnings, rather than a capital event for most of our companies,” explain analysts.
Ultimately, analysts feel that above-budget catastrophe losses would be absorbed by underlying earnings, with most of the companies in BofA’s universe still expected to generate a profit, albeit greatly reduced.
Earlier this week, reinsurance broker Gallagher Re pegged insured nat cat losses for the first half of 2024 at $61 billion, which is 25% higher than the first half decadal average.
