Freak Weather May Cause Record Insurance Losses

The freakish outbreak of tornados in the Midwest, and Massachusetts, may make for the worst three months ever for insurance losses, according to a Morgan Stanley estimate. With the New Zealand and Japan earthquakes in the first quarter and the hurricane season just beginning, 2011 could be a record year for acts of God.

"The second quarter is on track to be one of the worst on record as severe thunderstorms and tornados have devastated parts of the Southern and Midwestern United States in two outbreaks," said Gregory Locraft, who covers the reinsurance industry for the firm, in a note Monday. Our "model losses, plus industry commentary, point to industry losses north of $10 billion, more than two times second quarter 2010’s $4.5 billion."

"Aggregate loss estimates are rising for both the first quarter Japan and New Zealand events and we would not be surprised to see additional losses related to these events in second quarter results," adds Locraft.

Massachusetts’ officials said Tuesday that the rare series of tornados that hit the Western part of the state last week had caused $90 million in damage to homes alone, making it the worst disaster ever for the state. A tornado last month in Joplin, Missouri killed more than 140 people.

Moody’s said a week ago that it may downgrade Japan’s debt rating, citing bigger than expected losses from the March earthquake that is still reverberating as the nation struggles to contain the nuclear fallout from the damaged Fukushima plant.

"Japan’s losses were severe before the disaster and now are greatly exacerbated," said Steve Cortes of Veracruz, a research firm. Cortes, also a ‘Fast Money’ trader, is actually using the weakness in U.S. nuclear-related firms such as Southern Companies (SO) and Exelon (EXC) as a buying opportunity.

For the rest of investors, the catastrophes have only added to the uneasiness in place in the market this year as it awaits Federal Reserve Chief Ben Bernanke’s next monetary move, the resolution of the Greece crisis and the next country to be toppled in the Middle East.

But some traders feel like investors are quite scared enough, with the S&P 500 only down around 5 percent from its bull market high.

"I detect a lot of complacency given the type of consistently disappointing economic data we are seeing and the looming end of QEII, not to mention acts of god, or a global political shock," said Alec Levine, managing director of risk arbitrage at WallachBeth Capital LLC. He’s recommending a strategy of buying calls on the CBOE volatility index three months out for clients to protect themselves.

The National Hurricane Center today reported the first tropical depression of the season, south of Acapulco, Mexico. Five hurricanes will be Category 3 or higher this season, according to the Colorado State University forecasting team, that’s higher than the average of just two major storms.

Fifty percent of global catastrophe losses typically occur in the third quarter during hurricane season, according to Morgan Stanley’s Locraft. Despite these expectations, the analyst still recommends buying reinsurers RenaissanceRe (RNR), Ace Limited (ACE) and Axis Capital (AXS) because of their strong balance sheets.

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