QBE exhausts, goes $600m beyond, catastrophe aggregate reinsurance

Australian insurer QBE Group has announced that it expects a US $600 million hit to 2017 profits due to recent catastrophe loss activity, which means the company has burnt through its entire $900 million of aggregate reinsurance protection and losses have climbed far above that protection after the combined impacts of 2017 catastrophe losses.

The company said that the combined impacts of 2017 loss events, including cyclone Debbie, hurricane Harvey, hurricane Irma and hurricane Maria, and the two earthquakes in Mexico, have all hit QBE’s businesses hard and that this will now mean the company needs to increase its 2017 large individual risk and catastrophe claims allowance.

QBE expects that the combined impacts of these major catastrophe loss events will cost the firm a pre-tax impact to earnings of around $600 million, meaning it raises its catastrophe allowance to $1.75 billion for the year.

This also means that QBE has burnt right through its 2017 aggregate reinsurance protection, which attached after aggregate retention of $1.15 billion of losses, for events with a franchise deductible above $2.5 million and provided $900 million of coverage.

That aggregate reinsurance layer is now gone, a QBE spokesperson confirmed this to Artemis this morning.

Hence, effectively the aggregate retention now rises by $600 million to the $1.75 billion for the rest of the year, based on the latest estimates of losses from recent events and an allowance for a normal fourth-quarter of catastrophe events.

This $900 million of aggregate reinsurance protection is not placed in the open market though, rather it is placed with a single reinsurance firm believed to be Berkshire Hathaway.

QBE has other reinsurance arrangements, including excess of loss protection for individual business units, a group risk XL and cat XL program, risk XL coverage for non-property classes of business, as well as its captive reinsurance vehicle Equator Re.

There is likely to be some collateralized or ILS fund market participation in some of these other reinsurance arrangements, given the size of QBE’s program.

QBE also benefits from a private catastrophe bond arrangement as it has been reported that the $187m Resilience Re Ltd. (Series 1712) cat bond lite benefits the insurer.

Unfortunately this Resilience Re cat bond, issued through Willis Towers Watson Securities club platform, is not a transaction we have much detail on, knowing only that it covers the sponsor (so QBE reportedly) against certain catastrophe exposures across a two-year term. So it is in-force currently, but we have no way of knowing whether the reinsurance it provides is at risk of paying out on the 2017 catastrophe losses.

QBE now expects that it might fall to a loss for the full-year, shifting its combined operating ratio target to between 100% and 102%.

John Neal, CEO of QBE, commented; “While it is too early to speculate how much reinsurance and primary insurance pricing will rise as a result of recent catastrophe experience, QBE is well placed to benefit from price rises with much of our reinsurance programs already purchased for 2018.”

That may prove a very savvy move, as the insurer will no doubt need to top-up some protection for 2018 but having some of its reinsurance program already secured, multi-year coverage no doubt, will save the company money should there be any price rises at the upcoming January renewal season.