What 3Q Catastrophe Losses Mean for U.S. P/C Results

October 16, 2020

Driven by an elevated frequency of events during the quarter, third quarter natural catastrophe losses for the U.S. property/casualty insurance industry will be the largest since the third quarter of 2017, according to Fitch Ratings.

Fitch said the (re)insurers it rates are largely “well-positioned to absorb these recent catastrophes,” as their balance sheets were prepared for a potentially strong hurricane season and invested asset values recovered in recent months from earlier unrealized losses.

A number of (re)insurers have pre-announced this third quarter’s catastrophe estimates that are material, with losses attributable to a series of events experienced in the U.S. in the quarter, including Hurricanes Isaias, Laura, and Sally, the Derecho Windstorm, and wildfires in California and Oregon. A handful of global (re)insurers may also include losses from the August Beirut explosion in third quarter results.

Hurricane Laura represents the largest individual loss event with estimated insured losses between $11 billion-$15 billion. In total third quarter events could sum to approximately $25 billion, moving 2020 to an above average year for natural catastrophe losses.

These losses are exclusive of substantial losses incurred in first half of this year related to the coronavirus pandemic. These losses are likely to increase further over the remainder of the year.

The accumulation of losses is expected to exceed many individual company catastrophe budgets and further pressure full-year 2020 earnings, according to Fitch analysts.

In addition to third quarter loss activity, last week’s Hurricane Delta, the second landfalling hurricane in Louisiana in less than a month, is expected to add $1 billion to $3 billion of insured losses to full-year results.

Fitch said it expects that the nature of third quarter losses, and the more moderate insured loss amounts of individual events, means the losses shifted proportionately more towards primary insurers relative to reinsurers, as catastrophe excess of loss reinsurance programs absorb a smaller share of claims. For a number of primary insurers, the third quarter will represent the “largest net retention of catastrophe losses in a third quarter period in the last decade,” Fitch said.

Allstate Corp. reported a total of approximately $1.1 billion of catastrophe losses in July and August, exceeding the total of any 3Q period since 2011. Publicly held homeowners’ specialist companies that have diversified outside of Florida will report losses from between four and six named storms during the third quarter. Some of these entities may have higher third quarter net catastrophe losses this year than in the third quarter of 2017 from Hurricane Irma.

Other carriers reporting include AXIS Capital Holdings Ltd. announcing a preliminary pre-tax net loss estimate in the range of $225 million to $255 million for third quarter catastrophes and other events. Arch Capital Group Ltd. estimates its pretax third quarter natural catastrophe losses could range from $190 million to $210 million.

According to Fitch analysts, aggregate reinsurance products that are designed to protect against an elevated frequency of small to medium sized catastrophe events is an area of the reinsurance market that is more exposed to the third quarter events. Travelers Corp. indicated in quarterly earnings commentary that the company at mid-year 2020 nearly reached the annual aggregate deductible on its reinsurance program. Fitch said it expects other companies that have secured aggregate reinsurance protection will exceed aggregate deductibles and recover losses from these programs in 2020.

The elevated catastrophe losses in the third quarter follow a rather modest period of non-coronavirus related catastrophe losses in the first half of 2020. Global natural catastrophe losses were below average for the first half of the year. Aon Securities estimated insured losses of approximately $26 billion in this year’s first six months, compared to a 10-year (2009-2019) average of $38 billion.

Fitch said it expects that earnings will remain weak in the third quarter following first half declines, but capital levels broadly remain strong, with little capital deterioration expected from these events.

Reinsurance limits for occurrence catastrophe excess of loss programs are expected to remain largely in place for the fourth quarter despite the catastrophe activity thus far during the year. However, the heightened frequency of catastrophe events in the second half are likely to “continue to put upwards pressure on reinsurance rates at the upcoming January 2021 renewal period.”

Top photo: Cars and a motorcycle are are submerged in floodwaters on a street, Wednesday, Sept. 16, 2020, in Pensacola, Fla. Hurricane Sally made landfall near Gulf Shores, Alabama, as a Category 2 storm, pushing a surge of ocean water onto the coast and dumping torrential rain that forecasters said would cause dangerous flooding from the Florida Panhandle to Mississippi and well inland. (AP Photo/Gerald Herbert)

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