As the 2015 Atlantic hurricane and tropical storm season gets underway, analysts at RBC Capital Markets claim that a continuation of benign catastrophe losses would be the best-case scenario for European reinsurance market players.
In its latest equity research report, titled “European Reinsurance, Too early in the year to become constructive,” Canadian investment bank, RBC Capital Markets explores the earnings outlook for firms, in light of the commencement of the 2015 Atlantic hurricane season.
“At this point, given the significant capital supply-demand imbalance in the industry we believe the best case scenario for the industry would be for the light year for natural catastrophes to continue or for a very severe event to occur,” explained RBC.
Expanding on this, the investment bank claims that unless an event is significantly larger, or more costly than anything witnessed in the last 15 years, it’s highly unlikely that any event would cause any notable swing in current pricing trends.
“We see little hope for a prolonged positive shift in pricing due to the continued excess capital in the industry and the number of new entrants that have been entering the industry,” confirmed RBC.
And with the 2015 Atlantic hurricane and tropical storm season predicted to be another below-average term, despite an unseasonably early start with tropical storm Ana in May, it’s possible that RBC’s perception of low cat losses being a benefit to European reinsurers could be put to the test.
However, as seen in 1992 with hurricane Andrew and highlighted in RBC’s report, a lack of hurricanes during a season doesn’t necessarily mean a loss free period for re/insurers, as it only takes a single storm making landfall to create substantial losses, particularly if it occurs in a built up, populous area.
It’s also worth remembering that should a hurricane make landfall in an area with high volumes of infrastructure and that is densely populated, the increased asset values in the world today would potentially incur far greater costs than in 1992.
Similarly, the rise of coastal migration in the U.S. and other parts of the world is also a threat here, as more people choose to live in areas susceptible to water stress and storm surge, the latter of which can often cause greater damage than the actual storm itself.
Discussing the negative impact an average or typical Atlantic hurricane season would have on the European reinsurance sector, RBC said; “If catastrophe losses are ‘normal’, we believe that this would not lead to any uptick or stabilisation of pricing and would only serve to dampen capital returns.”
Interestingly, in its report RBC notes that with the exception of Swiss Re, the three other large European reinsurers, being Munich Re, SCOR and Hannover Re, have all increased their exposure to U.S. windstorm scenarios year on year.
“Some of this increase is likely to have come from movements in the USD/EUR exchange rate but also represents underlying changes in exposure in our view,” said RBC.
Looking forward RBC is reserved to give any promising commentary and remains cautious on the space, due to the “significant tail risk from hurricane losses between now and year end.”
RBC continued; “We do not expect support from capital returns to emerge for the European reinsurers until October when the majority of hurricane season has passed.”
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