Gray Skies Are Gonna Clear Up: Swiss Re (SREN)

Image: Courtesy NASA

Fewer major storms Portend lower losses –and higher insurance industry profits

Disaster might just be having an off year. The year 2024 was supposed to be a barn burner for bad weather. Forecasters at the U.S. National Weather Service and Climate Prediction Center, researchers at Colorado State University, and the U.K. Met Office all predicted dramatically more organized cyclones. Modelers cited high ocean temperatures and unusually intense La Niña climate cycles as drivers for a record number of storms. 

However, as of early September – usually the statistical peak for cyclonic activity – these natural disasters have yet to materialize. And at least so far, Swiss Re (SREN), the large Zurich-based insurance company for insurance companies, emerges as the obvious point-of-entry for a less than violent storm season.

As we go to post, the National Hurricane Center had named only 3 tropical cyclones for the season. And it was tracking no organized low-pressure systems in the Eastern Pacific, one single moderate tropical storm in the Central Pacific, and only 3 moderate low-pressure systems in the Atlantic, with 2 having less than a 30% chance of spinning up into a major storm. The lack of bad weather has led media companies to be creative on how to fill its story budget: Fox News was trying to cast these 3 Atlantic disturbances as major risks. There’s exactly a 20% chance of that. 

Hints of this lower cyclonic activity are finding their way into the numbers. NOAA’s Billion Dollar Disaster Year-To-Date Event costs, a benchmark that tracks storm losses, estimated that, as of August 2024, damage was in line with previous seasons. These losses were mostly from Hurricane Beryl, severe storms in the Northeast, and wildfires in the West. 

2024 storm damage from July is in line with previous years, mostly from Hurricane Beryl, severe thunderstorms storms, and fires in the West.

But if those estimates were walked into September, the United States would need to suffer an additional $310 billion in losses to surpass the $366 billion lost during 2017. That was the year that waves of massive Category 4 and 5 cyclones like Irma, Harvey, and Maria tore up the Atlantic Coast.

But activity has been so light that there would need to be an additional $310 billion in damage over the next three weeks to match a peak year like 2017, where waves of massive storms tore up the Atlantic Coast.

So far, the public weather models – with about a 14-day prediction window – indicate no such damaging events. The usually reliable European Centre for Medium Range Forecasts is calling for benign storm activity at least until the third week of this month. And visualizations of that prediction indicated how benign the rest of the month is expected to be. 

Nothing is ever certain when it comes to weather, but clearly it would take quite a run to turn this September into a month of all-out weather-driven carnage.

Reliable predictive models for the next several weeks are calling for benign major storm activity for much of the Atlantic.

Easy Bet on the Weather 

Betting on weather usually involves devilishly complex weather derivatives. One party, say a utility or a farming conglomerate, buys a weather-related asset like electricity. The other party promises to pay depending if more or less power is consumed. Weather derivatives are glitzy in these uncertain times. As weather bets don’t correlate to any other asset in the financial spectrum.

What’s unique about this storm season is that betting on the weather is far simpler than usual. The global economy is coming out of the grim growth period that has been hard on insurance companies. Firms are finally able to capture premium increases in the 7% range. Inflation is softening. Total return-on-equities might get into the 10% range. Insurers have been offering improved guidance: Underwriting will grow to $95 billion, up about $4 billion from the beginning of the year. Not risky indeed. 

Investors are already sensing the coming profits in insurance. The benchmark Invesco KBW Property and Casualty ETF, which basically prices out the sector, grew in value by 50% from this time last year. With news this good, the downside risk for any particular insurance company is relatively low, while the fortunes for the insurance sector in general should improve. 

There will be lower payouts for losses as a result of a benign storm season. 

Swiss Miss Is Bliss

Legend has it that Swiss Re got its start insuring insurance companies in 1861, when the mountain town of Glarus burned down and there was not enough private coverage to rebuild. Since then the firm has grown to be a major player in reinsurance and asset management. It has about a $36 billion market cap, improving cash flow of operations and a dividend of about 5%. But high Covid-related losses and a challenging inflationary cycle have kept margins and valuations down. 

Its current price-to-earnings is stuck at a darn cheap $10.50. 

Usually, betting on weather is tricky and expensive. But conditions are lining up to make a simple bet on a major reinsurance company like Swiss Re relative simple and low risk.

However, nothing is ever certain when it comes to the weather. Any kind of query to established weather experts has been met with a stern “the season is not over yet.” More bad weather is expected. The U.S. Climate Prediction Center says that La Niña atmospheric conditions to promote more cyclonic activity have a 66% chance of arriving in late September or even early November. But as each day passes, the days in the northern hemisphere shorten, the energy in the atmosphere lessens, and it becomes less likely that 2024 will be the worst weather year ever.

Meaning, even if this year’s storms do materialize, it’s not too early to speculate on the dramatically lower insurance company payouts these storms will require.

“So einfach ist das,” as they might say in Zurich: “It’s that simple.”