NU Online News Service, June 17, 11:18 a.m. EDT

Reinsurance carriers are either a great stock to buy or an indicator of a hard-market turn, depending on how catastrophes shake out this hurricane season, say experts.

While this may seem contrary to conventional thinking, Joshua Shanker, an analyst with Deutsche Bank Securities Inc., says in a note that property and casualty reinsurers are a recommended buy during hurricane season.

He reasons that despite the catastrophe exposure, reinsurance stocks have done well in the second half of the year since 1992, appreciating at almost 11 percent and outperforming the broad market by 7 percent.

Shanker says the impact of a major event may be “pre-discounted,” having been sold off in advance of hurricane season, and the stocks “continue to trade at meaningful discount to book.” He says reinsurers could take a $20 billion hit—an event such as Hurricane Ike in 2008—and still trade below book value.

“We believe that these stocks anticipate a historically bad scenario in advance of hurricane season and appreciate when it does not occur,” he writes.

If there is a major loss event, it could appreciate reinsurers’ stock because investors will see an opportunity for carriers to seek price increases, pumping up their earnings.

On the other hand, buyers could be in for a spike in pricing sooner than some suggest if the rate of catastrophe occurrence continues through hurricane season, says Charles L. Ruoff, president of CR Market Strategies Inc., a consulting firm.

Referring to his estimate that commercial risk pricing might be on the upswing later in 2012, he says catastrophes earlier this year could change that analysis.

“While we don’t think these events have been of sufficient size to alter our outlook, it is still early in 2011,” he writes in a recent newsletter. “If the size and frequency of events continue for the remainder of the year, we could see earlier pricing changes than we anticipated.”

He notes that the catastrophes the U.S. has suffered so far this year—estimated to be as high as $13 billion in insured loss by some estimates—could equal all of last year which stood at $13.8 billion. If the industry reaches the high end of the loss estimates before entering the hurricane season, that could have an impact on reinsurance, which would eventually impact standard carriers as rates increase in the face of losses.

While the estimates are preliminary, he says “they may spell trouble ahead should the final tally come in at the higher end of the estimates and we start the hurricane season with any activity that should make landfall.”

Ruoff advises brokers that they should not be preparing clients “for more rate reductions and enhanced insurance coverage benefits, but rather advising on a strategic plan for when (not if) the cycle goes the other way. Underwriters are now ‘talking up’ the potential increase in commercial rates, but this is not yet universal until the financial pain is widespread, and we are not there yet.”

This story was updated June 20 at 6 p.m. with a clarification of Ruoff's notes on catastrophe estimates and his conclusion.