Zurich Insurance Group’s fourth-quarter and full-year 2016 results show that the firm had to call on its Farmers Exchanges catastrophe reinsurance treaty for the first time, as catastrophe losses led by Texas storms increased to more than $1.3 billion.
The catastrophe reinsurance programme was put in place three years ago with a catastrophe deductible of $1.25 billion. A comprehensive reinsurance treaty that Zurich hasn’t needed to call on until 2016, when catastrophe losses spiked to beyond $1.3 billion, with more than half of the losses coming from severe storms in Texas, says the firm.
The Farmers Exchanges is made up of the Farmers Insurance Exchange, Truck Insurance Exchange, and Fire Insurance Exchange, which combined form a U.S. property and casualty insurance entity that is owned by its policyholders. Some years ago Zurich acquired Farmers Group (Farmers), which includes Farmers Management Services and Farmers Re, providing insurance management services and reinsurance to the Farmers Exchanges.
The Farmers Exchanges combined ratio for the full-year 2016 worsened to 103.9%, driven by the increased catastrophe losses of more than $1.3 billion. However, investment income and capital gains realised by the Farmers Exchanges despite higher cat losses, meant that its surplus remained largely unchanged from the previous year, says Zurich.
Moving away from the Exchanges, Farmers Group recorded a business operating profit of $1.5 billion in 2016, which is growth of 7% on the previous year, although this was partially offset by a decline in Farmers Re, says Zurich.
For the first time since its inception the reinsurance unit, Farmers Re’s All Lines Quota Share catastrophe reinsurance treaty reached its loss limit of $100 million in the month of November, which underlines the substantially higher volume of cat losses experienced throughout the year.
Farmers Re recorded a decline in business operating profit of 32% to $42 million, which reflects a 2.1% deterioration in the combined ratio and lower investment income, which is “a result of the capital repatriation out of Farmers Reinsurance Company late in 2015,” says Zurich. Continuing to add that this was somewhat offset by a $25 million accounting adjustment taken in Q3, 2016.
“A further USD 400m dividend was paid out of Farmers Reinsurance Company towards the end of 2016,” explains Zurich.
An increase in catastrophe losses during 2016 clearly had its impact on a number of insurers and reinsurers, and with profitability already challenging in a pressured environment it only takes a slight uptick in catastrophe events for companies to feel the impact.
For the first time ever Zurich had to claim on its Farmers aggregate catastrophe reinsurance programme, while its Farmers Re subsidiary achieved its loss limit during November, another first, highlighting the value reinsurance protection has and the damaging impact higher cat losses can have on companies’ balance sheets.