Blue Capital Reinsurance Holdings Ltd., the stock exchange listed, collateralized reinsurer owned by Sompo International Holdings Ltd., has announced a raised estimate for Q4 catastrophe losses, as well as further loss creep from hurricane Irma.
The collateralized reinsurance vehicle has experienced similar increases in losses to other insurance-linked securities (ILS) funds and strategies throughout recent months, so it’s no surprise to see a raised estimate for events including the California wildfires, or continued loss creep from 2017’s hurricane Irma.
For fully collateralised underwriters the last year has been fraught with difficulty in getting loss estimates right, resulting in negative performance through many months of the year for ILS funds and strategies, as evidenced by the ILS Advisers Index which currently looks like it could end 2018 with six negative months.
Blue Capital Re reported an early estimate of Q4 catastrophe losses in December, when it estimated a $17 million hit from hurricane Michael and the California wildfires.
Now the collateralized reinsurer estimates the quarter will result in a $30 million catastrophe loss, after taking into account its own retrocessional reinsurance and reinstatement premiums.
The higher Q4 loss estimate was driven by increased claims from ceding clients and industry loss estimate updates primarily related to Typhoon Jebi (a Q3 event so here Blue Capital Re is also experiencing loss creep as so many others have) and the California wildfire outbreak, as well as the continued loss creep from hurricane Irma.
Based on these increased estimates of Q4 losses, Blue Capital Re said that its year-end 2018 fully converted book value per common share is expected to be between $10.00 and $10.50.
Loss creep has become a significant issue for ILS funds and collateralized reinsurance strategies, with hurricane Irma and typhoon Jebi the primary drivers of this.
It’s hard for fully collateralized reinsurance strategies to significantly over-reserve for major catastrophes, to allow for possible loss creep. They can only do their best based on the available information at the time and if estimates rise significantly there is no option but to harden reserves and increase loss estimates.
This has become abundantly clear over recent months and highlights an issue in the provision of early loss estimates.
If loss estimates are substantially too low to begin with, then ceding companies tend to report low to begin as well, meaning when the industry estimates rise so to do the ceding company notifications of loss.
As collateralized and ILS players tend to set their initial reserves based on the same information the rest of the market has available at the time, but without the additional wiggle room to over-reserve that a leveraged underwriting strategy can have, they are more exposed to the industry wide loss expectation rising. Something we’ve seen in spades across 2018.