After $1.2bn catastrophe loss QBE sees an “orderly correction”

Australian and global insurance and reinsurance group QBE suffered over $1.2 billion of natural catastrophe losses in 2017, after reinsurance, but the company says that after a number of years of softening pricing and the major loss events of last year, it believes the market has begun an “orderly correction.”

QBE’s $1.227 billion of catastrophe losses hit it hard, as the firm had already burned through its entire $900 million layer of aggregate reinsurance protection by October and with more losses from the hurricanes and the California wildfires to deal with, it appears the tally kept rising.

QBE had also reported a worsening of its loss expectations from the 2017 catastrophes, as losses and adverse development from losses due to hurricane Maria added another $130 million to its tally.

The result of the catastrophe loss impacts, plus significant impacts from the U.S. corporate tax rate changes, was that QBE fell to a statutory 2017 net loss after tax of $1.249 billion, down considerably on the $844 million profit it made in 2016.

Across the group, QBE reported that its combined ratio for 2017 came in at 104.1%, citing, “Extreme catastrophe experience and a significantly reduced level of positive prior accident year claims development.”

The fact QBE’s aggregate reinsurance protection had been fully eroded added almost 6% to the combined ratio, as the company explained that, “Excluding the net cost of large individual risk and catastrophe claims retained in excess of the Group’s aggregate reinsurance protection, the adjusted combined operating ratio would have been 98.2%.”

In the United States QBE’s operations were hurt even more, due to the hurricanes and wildfires, resulting in a combined operating ratio of 109.1%, up from 98.5% in 2016.

QBE said that the catastrophe losses added 6.9% to the combined operating ratio of its U.S. operations, again as claims reached well above the aggregate reinsurance coverage.

QBE benefited from reinsurance protection through its group captive reinsurer Equator Re, which also laid off some of the group risk to the private market through retrocession purchases.

As QBE has tried to reduce its spend on external reinsurance it has channeled more risk into Equator Re, which has in turn been buying more retrocession. Equator Re has been retaining some business that would previously have been ceded to third parties, while also entering into quota shares with the QBE group businesses.

But because of this, Equator Re has a worse combined ratio than the group, with 140.9% for 2017 being more than double the 70.2% from 2016.

This is despite the “significant recoveries” that the QBE business and Equator Re made from external reinsurance providers during the year.

But QBE hopes to earn back some of its losses from 2017, with the market expected to offer a higher underwriting return over the year ahead.

The company notes that rates increased at the key January reinsurance renewals, saying that “the market has begun an orderly correction.”

While the correction has begun, it is not at the pace that QBE would have liked to see. Like so many other underwriters of reinsurance, the firm notes that the market has not hardened as much as it had hoped for.

“Whilst a more aggressive hardening of reinsurance rates may have been expected given the size of the insured losses, the more subdued price correction reflects the continued over supply of capital and the dispersion of the cost of catastrophe claims, much of which was retained by the primary market through multiple events with significant retentions,” the company explained.

But a correction it is and as a result QBE hopes for improved results in reinsurance in 2018.

“During the January 2018 renewal period there has been a general, albeit modest, increase in pricing across a wide range of classes (not just property catastrophe classes where loss impacted covers saw more significant increases). This should allow for an improved market in 2018,” QBE continued.

Also likely to benefit QBE’s results in 2018, as long as catastrophe losses remain within modelled expectations, the costs of its own reinsurance purchased through Equator Re has not risen much, given it has been locking in multi-year arrangements in recent years.

“Equator Re will not incur significantly higher reinsurance costs in 2018 reflecting the fact that 50% of the core catastrophe and per risk treaties and 100% of the aggregate cover was placed for two years commencing in January 2017,” the company said.