Upwards revisions to company loss reports from alternative capital providers and smaller reinsurers are expected to fill the $20 billion gap between industry loss estimates and aggregate company losses for hurricanes Harvey, Irma and Maria (HIM), according to Jefferies.
After Markel CATCo’s CATCo Reinsurance Opportunities Fund and the Blue Capital Alternative Income Fund reported increases to losses for recent catastrophes, the trend of upwards revisions is now underway with other alternative capital providers and smaller reinsurers expected to follow suit.
Equity analyst Jefferies said CATCo’s 2017 hurricane loss estimate rose by 18%, adding 3.6% to the 20% of Net Asset Value (NAV) reserved, for a total of 23.6%.
Blue Capital reported an additional charge equal to 1.01% of NAV, the firm recognised the need to hold additional risk margin as a collateral buffer for 2017 losses.
“Overall, we believe that this will begin to close the $20 billion gap between industry-level loss estimates and the bottom up total of reported carrier losses that we noted in December.
“This occurs after most major losses, with the initial Hurricane Katrina (2005) estimates rising by 20%, Sandy (2012) by 70% and Wilma (2005) by 68%. Thus far 2017 has been an anomalous year, with industry level loss estimates falling and with company estimates yet to rise,” said Jefferies.
However, Lloyd’s of London could be an exception to the trend, with greater conservatism in the Lloyd’s estimates and claims being slow to come in, their losses could fall in 2018, further widening the gap between industry and company loss estimates.
Jefferies added that in the face of a heavy loss year, it prefers European reinsurers due to their diversification, credit rating and balance sheet strength advantage over their Bermudan peers; “Our top pick in the sector is SCOR which was underweight in U.S. Florida catastrophe exposure in 2017, is seeking growth in the U.S. at the 2018 renewals and has seen its share price notably underperform peers in the aftermath of the storms.”
With a gap of $20 billion between reported losses and loss estimates from three of the biggest natural catastrophes in 2017, the full impact of the heavy loss year on the re/insurance market remains to be seen.
However, it’s so far once again driven home that when the market gets hit with heavy losses, it’s the most diversified market players with strong balance sheets that come out as winners.
