2Q catastrophe losses likely to exceed reinsurer budgets: J.P. Morgan

by Artemis on July 19, 2016

A high level of catastrophe activity in the second-quarter of 2016 is expected to result in losses that exceeds reinsurer budgets, suggesting some will have to endure the U.S. hurricane season absent the buffer of previous years, according to analysts at J.P. Morgan.

Overall, J.P. Morgan predicts that reinsurers will report weaker second-quarter results in the coming weeks, owing to heightened natural catastrophe frequency that included some fairly sizeable events, such as the Alberta, Canada wildfires, earthquakes in Japan, and flooding in parts of the U.S. and Europe.

“We expect higher losses in Q2 to largely balance with the better-than-expected experience of Q1, such that for the first half overall cat losses may be close to budgeted levels,” said J.P. Morgan.

As reported previously by Artemis, J.P. Morgan expects more than $13.3 billion of cat losses in the second-quarter, of which reinsurers will take nearly $7 billion, or roughly 50% of the loss, suggesting that some insurance-linked securities (ILS) firms will likely be hit too.

The benign loss environment has been persisting for some time, contributing to pressures in the re/insurance market that has resulted in a range of strategies and approaches being adopted by firms to try and navigate the market, which in recent times has included aggressive reserve releasing, among other trends.

But with reserves reportedly diminishing and the U.S. hurricane season officially open, some reinsurers could find themselves in a difficult situation should an active season develop and the market experiences a landfalling hurricane, for example, something that hasn’t happened in Florida for more than a decade.

“This is likely to be the most expensive period for reinsurers since 2011, and suggests that we have entered the U.S. hurricane season without the usual buffer that has been enjoyed in recent years,” said J.P. Morgan.

Despite this, analysts at J.P. Morgan don’t expect any meaningful impact on rates from Q2 events, echoing the views of numerous other industry observers and executives in recent weeks. And even though the U.S. hurricane season still has plenty of time to bring a few surprises, the analysts don’t feel the need to adjust full-year underwriting expectations.

The reinsurance market remains overcapitalised as a lack of demand fails to meet the inflow of reinsurance capital from traditional and alternative sources, and with competition so high and the market soft, it’s widely expected that a much larger event, $50 billion or larger, is needed to turn the market.

The growth of alternative reinsurance capital remains largely untested against a large event, but with reinsurers set to experience their costliest period since 2011, the ILS market’s recent expansion and growth into collateralized reinsurance means some ILS funds and managers can expect increased losses also, and the highest since 2011.

Industry analysts have noted since the beginning of the year that some reinsurers are aggressively releasing reserves in order to buffer balance sheets, one of several results of the low investment and underwriting return environment.

While the events of Q2 are unlikely to cause any significant damage to balance sheets or reserves, any ill discipline at recent renewals could come into light should the U.S. hurricane season prove to be an active one.

Should losses continue the trend set in Q2 through the remainder of 2016 it will be interesting to see the impact on reinsurer results, especially if the ability to release reserves continues to dwindle.

As ILS continues to broaden its reach and deepen its relationship with the re/insurance markets, any increase in losses here is likely to result in higher losses to ILS funds and mangers as well, underlining the need for discipline throughout the sector, especially during a soft market.

Evidence from recent pre-announcements shows that some re/insurers are shouldering perhaps larger shares of the recent losses than had been expected, with Bermudian players on the hook for a significant portion of the Canadian wildfires. It will be interesting to see how the second-quarter results play out.

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