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Q3 losses may exceed cat budgets, pressure earnings: Fitch

16th October 2020 - Author: Matt Sheehan

Analysts at Fitch Ratings have warned that the accumulation of catastrophe losses over the third quarter of 2020 may exceed the budgets of many companies and put further pressure on full-year earnings.

florida-stormThe level of cat losses reported by the US property and casualty (P&C) industry is at its highest since Q3 2017, Fitch noted, driven by an elevated frequency of events during the quarter.

But while the rating agency sees most re/insurers as well-positioned to absorb these losses, they will be particularly unwelcome given that the market already posted weak earnings over the first half of the year.

A number of re/insurers have pre-announced 3Q20 catastrophe estimates that are material, including RenRe, Allstate, AXIS, and Arch.

Losses were mainly attributable to a series of major US events, such as Hurricanes Isaias, Laura, and Sally, the Derecho Windstorm, and wildfires in California and Oregon.

Hurricane Laura represents the largest individual loss event with estimated insured losses between $11 billion-$15 billion.

In total, Fitch believes that third quarter events could sum to approximately $25 billion, moving 2020 to an above average year for natural catastrophe losses.

And this figure does not even account for losses related to the COVID-19 pandemic in H1, which are likely to increase further over the remainder of the year.

In addition to Q3 loss activity, Hurricane Delta became the second hurricane to landfall in Louisiana in less than a month, and is expected to add $1 billion to $3 billion of insured losses to full-year results.

Given that third quarter cat losses were driven mainly by a large number of more moderate events, Fitch expects the distribution of losses will shift 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, analysts suggest that Q3 2020 will represent the largest net retention of catastrophe losses in a third quarter period in the last decade.

However, one area of the reinsurance market that is more exposed to the Q3 events is aggregate reinsurance products that are designed to protect against an elevated frequency of small to medium sized catastrophe events.

Travelers Corporation, for instance, indicated in quarterly earnings commentary that it nearly reached the annual aggregate deductible on its reinsurance program at mid-year.

Fitch expects other companies that have secured aggregate reinsurance protection will exceed aggregate deductibles and recover losses from these programs in 2020.

That said, the elevated cat losses of Q3 followed on from a comparatively modest period of non-coronavirus related losses in H1,when global cat losses were recorded as below average.

Analysts at Fitch forecast that earnings will remain weak in Q3 following H1 declines, but note that capital levels broadly remain strong, with little capital deterioration expected from recent cat events.

Reinsurance limits for occurrence catastrophe excess of loss programs are also expected to remain largely in place for Q4 despite the elevated catastrophe activity, although the market should be prepared for a further uptick in reinsurance rates at the January renewals.

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