Reinsurance investors opt ‘Buy’ hard market over ‘Sell’ Ian losses

Hurricane Ian may have submerged swathes of Florida coastline and select reinsurer large loss budgets, but has yet to douse the hopes of stock market investors who bet a long-term hard market beats a short-term cat loss.

Investors are “evidently looking to the substantial renewal pricing upside rather than the quarterly earnings headwind,” analysts at Jeffries told markets of what they consider “relatively benign share price reaction.”

Loss estimates on Ian are surging, from initial sums just over $20 billion to more recent high bids over $70 billion. That places a question mark over P&C reinsurance earnings with further concerns that “some already stressed reinsurers” with high to-date 2022 cat losses could print red ink or even, “in a minority of cases,” see credit ratings totter.

Too much noise has already been made about the plethora of drivers nearly guaranteeing a hard market, Jeffries believes. Inflation-driven demand and capacity constraints have more than pushed price discovery, the running mantra has claimed.

Investors agree most in the case of Hannover Re, which has outperformed European large cap equity as a whole. Shares of the blue-chip reinsurer fell 2.9 percentage points (pps) in excess of the decline for the Euro Stoxx 50 for the week leading to Ian's Florida landfall, but have since rebounded by 2.8% while the broad market has dithered (to late session Wednesday, October 12).

Amongst the other top European reinsurers, Munich Re held its pre-Ian slide to with 1.8 pps of the large-cap measure but has recently given back the ensuing rebound. Swiss Re and SCOR suffered the steeper declines, at around 10% for the week ahead of Ian's landfall and several percent since.

The lingering concern: markets need not accept that argument year after losing year. No one knows how brittle sentiment might prove.

“Having reiterated this argument for more than five consecutive years, we were concerned that the market's patience would be wearing thin waiting for this thesis to pay off,” Jeffries analysts wrote.

Share price resilience looks “both surprising and highly reassuring” as it suggests “the market is still prepared to take a longer-term view.”

Key London market names have moderately underperformed the FTSE, doubling the market’s loss in the week prior to Ian landfall then outperforming to late afternoon Wednesday.

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