Hurricane Irene, threatening to become the first hurricane to hit the United States in three years, could be the catalyst the insurance industry has been seeking in its quest for across-the-board premium increases after years of weakness.

Like speculators in the futures market who applaud the effects of drought on wheat prices, another disaster could ultimately cheer investors in insurance and reinsurance stocks. Major storms in 2004 and 2005 triggered a surge in insurance stocks after the fact.

Since Hurricane Ike in 2008, though, the United States has enjoyed relatively mild weather by disaster standards, up to this year.

Weather-tracking maps on Monday suggest Irene could make landfall as soon as late Thursday. Though the tools are less reliable in advance of 72 hours from landfall, some models forecast that the Carolinas are vulnerable to a major storm with winds in excess of 110 miles per hour.

Regardless, 2011 already promises to be the costliest year in history for natural disasters around the globe.

By some estimates, insurers have lost as much as $90 billion already this year, 20 percent more than they lost in 2009 and 2010 combined. Insurers have not been able to raise rates for three years amid strong competition and readily available supply, but industry veterans say even a small storm now would be enough to trigger premium hikes.

It wouldn't take much of a material event to cause significant firming, said Gary Prestia, chief executive of the U.S. business at global reinsurer Flagstone Re. It wouldn't take the typical $40 billion Katrina to push this into a firmer market than it is currently.

FIRMING PRICES, FIRMER SHARES

If prices firm, then analysts say it is a fair bet that share prices will follow.

Most property and casualty insurers are now trading at historically depressed multiples of their book value. Property insurance stocks at their peak typically trade at two times book value, according to analysts at Barclays Capital. At a sector median of 0.83 times book today, according to Thomson Reuters data, that makes them cheap.

Historically, shares of reinsurance companies, which insure the insurers, lose value during typical late summer and early fall hurricane seasons but rally sharply after major storms, according to an August 22 research report from JMP Securities. Share prices across the sector rose, on average, about 32 percent in 2004 and 20 percent in 2005.

We see similar upside going into the heart of the 2011 hurricane season as we believe a modest windstorm ($20 billion) could have a significant impact on rates that would normally follow a $50+ billion event, analyst Matthew Carletti wrote.

Shares of many of the largest insurers and reinsurers based in Bermuda are down sharply this year despite the active hurricane season. ACE Ltd, XL Group, PartnerRe and Everest Re are down between 10 and 24 percent since June 1.

LOCATION, LOCATION, LOCATION

Whether Irene wreaks the $15 billion damage mark that can turn the market depends to a great degree on where it hits. A weak Category 1 hurricane in Miami would probably not have enough power to trigger rate hikes.

On the other hand, any catastrophe modeling company will say that a Category 4 or greater hurricane in Miami --storms can ascend as high as Category 5 -- would be devastating.

The U.S. National Hurricane Center's five-day forecast showed the first hurricane of the 2011 Atlantic season swinging up Florida's east coast on Thursday for possible landfall in South Carolina on Saturday.

If the forecasts are verified by the actual event, this'll just be another multibillion-dollar event on top of an incredibly busy year already, said Jose Miranda, a senior executive at catastrophe modeling company Eqecat.

Hurricane season is only one-third over and we've already had almost a full year's activity on average already, said Miranda, a meteorologist.

The Carolinas, which were ravaged in September 1989 by Hurricane Hugo, one of the 10 worst natural disasters in the United States, are particularly vulnerable. The coastal population of the two states more than doubled between 1960 and 2008, according to U.S. census data. South Carolina has successfully wooed private insurers but its northern neighbor has been less successful, insurance executives say.

The Insurance Information Institute earlier this summer reported that the potential loss exposure of the North Carolina Insurance Underwriting Association -- the state-created insurer of last resort -- increased 60 percent in the last six years.

The NCIUA, which says it can cover up to $4 billion in losses, is funded by insurers that operate in North Carolina and share losses equally in a disaster. Any payouts beyond that could force the group to issue bonds, it has said.

Among the biggest members, by percentage share of liability, are State Farm, Nationwide and Allstate.

NCIUA on Monday said the approach of Irene could lead its members to stop writing new policies or impose restrictions on existing ones in the next two days.

Insurers have complained for years that the North Carolina consortium is underfunded and could be undermined by a once-in-50-years type of windstorm. (Insurers consider a one-in-100 year storm a benchmark of serious disaster.)

Some worst-case scenarios are covered by catastrophe bonds, which insurers and reinsurers use to transfer risk to outside investors. The percentage of the cat bond market with exposure to U.S. hurricane risk has grown from 38 percent in 2003 to 71 percent today, according to broker Guy Carpenter.

(Additional reporting by Jane Sutton in Miami and Sarah Mortimer in London, editing by Matthew Lewis)

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