As the U.S. P/C Industry gears up for 2020 third quarter earnings disclosures, indicators point to an elevated number of natural catastrophe losses, Fitch Ratings said in a new market update.
Fitch predicts that carriers/ reported Q3 natural catastrophe losses will be the largest since the 2017 third quarter. As well, Fitch said a number of primary insurers will face a third quarter that represents “the largest net retention of catastrophe losses in a third quarter period in the last decade.”
Elevated catastrophe losses are hitting along with the ongoing coronavirus pandemic and the uncertainty it continues to cause. Fitch’s Q3 natural catastrophe tabulation excludes COVID-19 losses, which Fitch said are reaching an even more dramatic level on their own. COVID-19 losses will continue through the year, and Fitch said they are “expected to exceed many individual company catastrophe budgets and further pressure full-year 2020 earnings.”
Q3 Natural Catastrophes Can Be Handled
In terms of Q3 2020 earnings, Fitch said that insurers and reinsurers can handle the natural catastrophes, considering “carriers’ 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 natural catastrophes during Q3 are to blame for the expected spike, including Hurricanes Isaias, Laura, and Sally, the Derecho Windstorm, and wildfires in California and Oregon. Fitch points out however, that some insurers and reinsurers may also include losses from the August Beirut explosion in their Q3 results.
Of all the natural catastrophe’s that struck in the 2020 third quarter, Hurricane Laura caused the most damage. Fitch said that estimated insured losses from the event are now between $11 billion to $15 billion. That represents a significant chunk of third-quarter events, which Fitch predicts could run up to $25 billion.
In addition to 3Q20 loss activity, Hurricane Delta, the second landfalling hurricane in Louisiana in less than a month, could add $1 billion to $3 billion of insured losses to full-year results.
Fitch expects the nature of Q3 losses, and the more moderate insured loss amounts of individual events, will produce a loss distribution more towards primary insurers relative to reinsurers, as catastrophe excess of loss reinsurance programs absorb a smaller share of claims.
Among Fitch’s observations:
Publicly held homeowners’ specialist companies that have diversified outside of Florida will report losses from between four and six named storms during 3Q20.
Aggregate reinsurance products that are designed to protect against an elevated frequency of small to medium sized catastrophe events have been more exposed in Q3. This has happened to companies such as Travelers, and Fitch said other companies with aggregate reinsurance protection “will exceed aggregate deductibles and recover losses from these programs” this year.
Fitch expects 2020 third quarter earnings to remain weak, after declines in H1 2020.
Insurer capital levels remain “broadly strong.”
Reinsurance limits for occurrence catastrophe excess of loss programs are expected to remain largely in place for through the 2020 fourth quarter, despite elevated natural catastrophe activity.
Higher catastrophe events going back to the 2020 second quarter will put the pressure on for rate hikes during the January 2021 renewal period.
Source: Fitch Ratings