Quantfury Gazette

An ‘extremely active’ hurricane season could challenge even the most prepared insurance companies

Nathan Crooks
Quantfury Team

Reinsurance companies such as RenaissanceRe (NYSE:RNR), Arch Capital (NASDAQ:ACGL) and Everest Group (NYSE:RE) have been acting to shore up finances and raise rates to better prepare for the catastrophic events they cover, but initial forecasts for the coming Atlantic hurricane season might make them want to further batten down the hatches. 

The Department of Atmospheric Science at Colorado State University is predicting “above-average probability” for major hurricanes to make landfall along US and Caribbean coastlines this season, which runs June 1 through Nov. 30. It’s an outlook that was shared in EuroTempest’s Tropical Storm Risk forecast, which said activity could be 70% above normal.

“The current sea surface temperature pattern globally is similar to 1969, 1998, 2005 and 2010,” EuroTempest said. “All these years had very active hurricane seasons.” Indeed, 2005 was the second costliest tropical storm season in US history and best known for Hurricane Katrina, which caused $108 billion in damage and killed 1,833 people after it slammed into the Louisiana coast.

While those aren’t predictions that anyone wants to hear, reinsurance companies — which provide coverage to insurance companies that actually underwrite individual policies such as Allstate (NYSE:ALL) and Progressive (NYSE:PGR) — have quietly emerged as a bright spot in the sector after raising prices throughout 2023, even though storm damage that year was just about $4 billion. Many companies in the sector have been underperforming peers that directly serve individual consumers, which suggests the market may not yet fully appreciate the changes the companies have made to better protect their balance sheets. Allstate shares, for example, have risen 15% this year, while Progressive has surged 25%.

RenaissanceRe, whose shares have risen 9.6% so far this year, made the repricing of catastrophe reinsurance coverage one of its primary goals last year, CEO Kevin O’Donnell said during the company’s most recent earnings call. “To achieve this step change, we needed to fundamentally realign the protections we provided to our customers against large catastrophic events,” he said. “We did this by significantly increasing rates and retentions and improving terms and conditions.” The company reported its 29th consecutive annual increase in its quarterly dividend in February.  

Everest Group, meanwhile, said 2023 was its most profitable year ever. Risk adjusted rates for catastrophic property coverage rose 7% in North America that year, according to CEO Juan Andrade. Its shares have risen just 1.8% this year. 

Reinsurance broker Gallagher Re said in a recent report that rate increases and reinvestment should keep reinsurance firms in the green, with the return on equity now “meaningfully above” the cost of capital. It said strong profitability in 2023 had allowed companies in the sector to have “fully recouped for weaker profit years such as 2017-2020.” Reinsurance firms could even expect normal returns if natural catastrophe losses double from the historically normal level, according to the report. That’s a solid position to be in.

Still, with returns so high, the good times may not last forever. If a hurricane doesn’t drain the coffers, new entrants seeking the profits could eventually bring down margins, according to ratings agency Fitch.

“Reinsurers’ underwriting margins are likely to peak in 2024 on significant price rises and tighter terms and conditions achieved in 2023 and in early January 2024 renewals,” it wrote in a report. “Reinsurance market conditions are likely to start to soften in 2025, as strong expected returns will attract an increasing amount of new capital.”

As warmer airs and waters return to the Northern Atlantic and usher in the coming hurricane season like clockwork, keen investors will want to pay attention to the emerging storms and cones of uncertainty they’ll bring. The storms are dangerous for people and infrastructure, but they can also move companies and markets.


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