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Reinsurers’ upwards loss provisions in 2018 to fill $20bn loss gap: Jefferies

7th December 2017 - Author: Marianne Lehnis

Remaining catastrophe losses still unaccounted for are estimated by Jefferies to be in the $20 billion ballpark – a disparity likely to fuel reinsurance price rises when some companies’ provide upwards loss provisions in 2018.

Loss gap“At first glance, it appears that the industry midpoint estimate of $95bn may have overestimated the losses. If true, then lower industry losses would challenge the prospect of a material rate rise at the 1st January renewals,” said Jefferies.

The $20bn loss gap aggregates the natural catastrophe losses reported at companies’ Q3 earnings for Hurricanes Harvey, Irma and Maria (HIM) and Mexican earthquakes, and compares this to industry loss estimates.

“Pre-tax losses net of reinsurance/retrocession are currently at $46bn. Estimating a $29bn loss for the alternative capital market, we still fall short of the industry estimate of $90-$100bn by just over $20bn,” said Jefferies.

Analysts said smaller Lloyd’s syndicates and U.S. insurers are among firms most likely to revise current loss reports.

After Hurricane Katrina in 2005 industry loss estimates rose by 20%, post Hurricane Sandy in 2012 figures rose as much as 70% – indicating loss revisions are still on the cards for Q3 reported losses.

A further reason to be sceptical of reported losses is demand surge – not all insurers have factored in the inflation of rebuilding materials and labour costs post a catastrophe event.

In addition, business interruption claims in Puerto Rico from Hurricane Maria are likely to be especially volatile, with large areas of the island still without power.

Jefferies also noted that reinsurers often report losses net of reinstatement premium received, meaning that actual losses are marginally higher.

“Our analysis of industry wide losses also suggests that the large European reinsurers have outperformed their peers, leading us to reiterate our preference for SCOR,” Jefferies said.

Munich Re and Swiss Re incurred the largest nominal losses with more than $3.5 billion each, however, Jefferies added that these losses are still materially lower in proportion to their book value than Bermudan and Lloyd’s of London peers.

European reinsurers dramatically outperformed their counterparts in the tax saving impact of losses; “European reinsurers appear to have particularly outperformed by saving 30%+ as a tax deduction, compared to many Bermudan reinsurers that saved less than 8%.”

Jefferies believes that the missing $20 billion gap will be filled over time through increased company losses and forecast that with still strong balance sheets in spite of recent losses, the European ‘Big 4’ are well placed to take advantage of the rate rise in 2018.

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