$20bn hurricane and 2017 catastrophe loss gap starting to close: Jefferies

by Artemis on January 24, 2018

Some alternative capital providers have started to report increased losses for recent catastrophe events, a trend that analysts at Jefferies expected to happen in 2018 in light of a reported $20 billion gap between company reported and re/insurance industry loss estimates.

In December last year, analysts at Jefferies said the $20 billion loss gap was likely a result of some firms’ loss estimates being too conservative, noting that in 2018 there was likely to be upward revisions to company loss reports.

“In our view this trend is now underway, with CATCo Reinsurance and Blue Capital Alternative Income Fund both reporting increases for recent catastrophe losses,” said Jefferies analysts.

Last week, Markel CATCo Investment Management Ltd. strengthened its loss reserves considerably for its listed retrocessional reinsurance fund, the CATCo Reinsurance Opportunities Fund, adding 14.4% of net asset value (NAV) for the California wildfires, and a further 3.6% of NAV for losses from hurricanes Harvey, Irma, and Maria.

At the same time, the Blue Capital Alternative Income Fund reported a charge that is equal to 1.01% NAV, as it recognised additional risk margin that needed to be held as a collateral buffer for losses experienced in 2017.

Increasing company loss reports, as seen with Markel CATCo and Blue Capital, is a trend that analysts at Jefferies expect to continue, ultimately reducing the gap with industry estimates.

“Give this material increase in the loss estimates for the listed alternative capital providers, we expect that a similar trend is likely to become evident at other alternative capital providers, as well as smaller reinsurers,” said Jefferies analysts.

As a result, Jefferies expects that this trend will start to close the $20 billion gap between previously reported company losses and industry wide loss estimates for 2017 catastrophe events.

For the devastating 2017 California wildfires, Jefferies notes that industry estimates have increased by over 75% from initial estimates, now expected to cost roughly $12.5 billion.

Rising wildfire and hurricane losses aren’t unusual though, and Jefferies highlights how initial Katrina, Sandy and Wilma losses also increased in the weeks and months after.

For the Lloyd’s marketplace, however, Jefferies suggests there is a greater degree of conservatism surrounding loss estimates, with the market reporting recently that claims were developing at a slower rate than normal.

Should Lloyd’s loss estimates be too conservative, this could widen the gap between industry and company loss estimates even more, warns Jefferies.

“We continue to believe that the missing $20bn gap will manifest itself in further increases to insurer and reinsurer company level losses, a trend which we expect the larger reinsurers will have already prudently reserved a margin for,” said Jefferies.

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