Macquarie Discusses Hurricane Season And Stock Plays

In a report published Monday, Macquarie Capital analyst Amit Kumar discussed the 2015 Atlantic Hurricane season, noting that a decade has passed since a landfalling Florida hurricane has struck. "To give you some perspective of how much time has elapsed since then, SPX was trading at 1248 at year-end 2005, 28 percent of US internet users were still using dial-up access and the last Star Wars movie was released," Kumar wrote. "Although Hurricane predictions have varied over the years, this year's is unusual with Dr Klotzbach/Gray team predicting one of the quietest hurricane seasons since the middle of the 20th Century." Kumar continued that the NOAA released their first hurricane forecast of the season which suggested a 70 percent change of a below-normal hurricane activity. Nevertheless, the analyst did note that from a historical perspective, in the event of an "active" Hurricane Season, stocks may sell off when hurricanes approach landfall in the U.S., only to recover beyond the initial sell-off. A "large" loss of $100 billion to $200 billion could pressure the "smaller players" with "outsized hits to equity" but rates could likely go up "meaningfully" for the market. A second scenario exists in which the Hurricane Season will result in some small damage but not enough to cause a serious dent in the capital position. As such, stocks may trade sideways before "pricing pressure" at 1/1/2016 reappear. Finally, under a "benign" Hurricane Season, stocks will likely recover towards the end of August and September in anticipation of good earnings/book value growth and resumption of share repurchases. Heading into earning season, Kumar suggested investors buy Arch Capital Group Ltd. ACGL given its diversified platform and relatively low cat exposure. Other names Kumar recommended investors "ponder" would be XL Group plc XL (post Catlin) and Endurance Specialty Holdings Ltd. ENH (post MRH). The analyst also noted that it is "too late" to play the consolidation trade anyways. Shares of Arch Capital are Outperform rated with a $69 price target. Shares of XL Group are outperform rated with a $42 price target. Shares of Endurance Specialty Holdings are Outperform rated with a $70 price target.