Friday, August 25, 2017

"As Harvey nears Texas, analysts highlight re/insurers risk of losses"

It used to be the hydrocarbon extractors in the Gulf that offered the best (most volatile) trading opportunities but with the advent of less conventional sources of oil and gas, and changes in infrastructure, the insurers and reinsurers are where the hot money herd has migrated.

Here's some bigger picture stuff from Artemis, August 24:
In a report on the potential hurricane threat posed by tropical storm (soon to be hurricane) Harvey, analysts at Peel Hunt highlight that it’s not a major hurricane that the re/insurance market needs to fear, or that will turn pricing. A series of smaller loss events where the majority of the exposure is retained, could be more impactful.
The report highlights Lloyd’s of London insurance and reinsurance firms with exposure to U.S. hurricane events, saying that the slim profits being made could easily be eroded were there to be a series of smaller hurricane, or indeed man-made losses, where the majority of the exposure was retained.
The market regularly discusses what is required to turn reinsurance pricing and move the softened market to one that exhibits at least a little firming.

Some call for massive mega-catastrophes, such as a $200 billion U.S. hurricane as the only way the market will turn, given that would erode a significant amount of reinsurance capital and insurance-linked securities (ILS) capacity.

But Peel Hunt say that re/insurers, specifically in the London market although this does apply to Bermuda and other markets as well, could find themselves hurting after just a moderate set of loss events.

“With underlying margins under pressure across the industry, even a series of modest Hurricane losses (particularly those that fall within retentions) during the peak season will highlight the low double-digit returns the Lloyd’s insurers are generating on a risk-adjusted basis,” the analysts explain....MORE
See also last October's "About Those Hurricane Matthew Stock Tips…":
Discerning reader will note we haven't had any "How to trade the hurricane" posts.
The general rule is don't trade the hurricane unless you have a time machine:
Time Machine from The Time Machine (and BBT)
and can go back to April 15th and the post La Niña and the Hurricane Season:
One of our ideas for later in the hurricane season (June 1-November 30, peak Sept. 10) is to bet against the insurers and reinsurers. Some of the P/C insurers with East Coast exposure: CB; TRV; ALL; HIG; SIGI....
The thinking was that the death of El Niño, combined with industry overcapacity leading to underpricing of risk and QE destroying any fixed income return from the float, that the insurers were climbing uphill.

An equal-dollar short of each of those five stocks on April 15 through the Oct 4 close (the last time we checked) went against you, but not much with the stocks up an average of 1.622% versus a gain in the S&P of 3.25%, a difference significant enough to make a bit of a hedge.

The short looks even better if measured from the close the day before the start of the hurricane season, May 31. From that day through Oct. 4 the basket was down 2.63% vs a gain in the S&P of 2.45%

The other hurricane trades, short REITs, long retailers (Home Depot, Lowes) etc. trade mainly on emotion that is usually best to fade.

The only 'cane trade I can think of that actually had legs was electrical generator company Generac which moved up as extra-tropical storm Sandy approached New York in 2012 and continued higher as folks came to understand the problems of a storm making landfall at the full moon high tide.
They sold a lot of generators in the next 18 months.

Finally, it used to be the surest trade was to buy the insurers as the damage was being assessed in anticipation of rate hikes but that is something we probably won't see as there is still so much capacity from the Property/Casualty folks, the reinsurers and insurance-linked securities like Cat bonds.

Just a note, insurance stocks like the Travelers are up because Matthew did less damage than forecast which is pretty funny as Travelers and I think Allstate pulled out of the Florida market and have no exposure anyway....
Speaking of Generac, it was up $1.51 (4.17%) yesterday, to $37.70.