Arch forecasts up to $145m coronavirus loss to P&C, reinsurance, mortgage lines

Arch Capital Group, the Bermuda headquartered insurance and reinsurance specialist underwriter, has released a forecast of its potential first-quarter losses due to the Covid-19 coronavirus pandemic, saying it expects up to $145 million of losses across its property & casualty insurance, reinsurance and mortgage insurance lines of business.

Arch is the first of the Bermudian re/insurers to make a pre-announcement of the potential impacts of the coronavirus pandemic on its insurance and reinsurance business.

Given this is only a forecast of the first-quarter losses, it’s safe to assume the second-quarter could be more significantly hit as claims are likely to continue flowing, particularly to the reinsurance businesses of major globally active and diversified players, such as Arch.

As losses are announced by major players such as this, where they have fallen within their portfolios will define whether there is any leakage to third-party capital vehicles, such as collateralised reinsurance sidecars or ILS funds that they operate.

Arch said that it estimates between $85 million to $95 million of pre-tax net losses across property casualty insurance and reinsurance segments, due to its exposure to COVID-19 global pandemic claims as of March 31st 2020.

In the mortgage insurance book, estimated claims are $40 million to $50 million, which Arch said is as a result of financial stress caused by the COVID-19 global pandemic. The mortgage impacts are due to Arch’s loss reserve picks being set at the higher end of indications, as of March 31st 2020, the company explained.

Arch noted the “significant uncertainties surrounding the ultimate number of claims and scope of damage resulting from this pandemic.”

Being net estimates, Arch is also estimating any benefits from reinsurance and retrocession in these figures.

“Actual losses from these events may vary materially from the estimates,” Arch also warned.

The re/insurer has not specified where its losses have fallen, but analysts largely expect the lions share to be within the expected lines of business such as cancellation, contingency, trade credit, travel etc.

However, analysts at Wells Fargo also said they anticipate some of the losses being within Arch’s property insurance book due to business interruption claims from the pandemic, with the E&S portfolio perhaps the area of exposure there as some E&S policies can include pandemic coverage.

Reinsurance is likely a smaller component of the overall loss, the analysts say.

But, any reinsurance claims within property lines could have the potential to see a portion fall into quota share arrangements that Arch may have with third-party capital.

In addition, some re/insurers have quota shares and sidecars that include some primary property insurance business, much of which will be E&S exposure. So as these loss pre-announcements come out they could signal some leakage coming from re/insurer managed sidecars, joint-ventures and potentially private ILS quota share arrangements.

Arch recently sponsored a sidecar issuance, with a $76.5 million sidecar issuance through the special purpose insurer Voussoir Re Ltd., it’s second transaction to use that vehicle.

Arch has a number of other third-party capital and ILS related activities, with private quota share arrangements, plus its mortgage ILS structures, and its fronting for ILS fund activities as well. On the mortgage ILS side, it seems unlikely any impact would be seen quickly, as it will take time for mortgage delinquencies to mount.

By utilising its Arch Re underwriting platform to provide third-party investors with access to reinsurance-linked returns, the company brings efficient third-party capital into its business to augment its own capacity, while also earning fees.

It’s impossible to guess how exposed reinsurers third-party capital vehicles may be to the coronavirus pandemic and the loss activity it drives, but it seems most likely any exposure is through property lines, both insurance and reinsurance.

Arch also announced an expected hit to the investment side of its business as well, saying it expects to report net investment income of $110 million to $115 million for the first quarter of 2020, which is below some analysts expectations.

But it is the total investment return (including realised gains and losses) forecast that shows the impact on the asset side of the balance-sheet, with Arch forecasting a total return on its core investment portfolio (excluding Watford Re) in the range of -0.65% to -0.95%.

That suggests it will be a challenging quarter for the third-party capital supported total-return reinsurer Watford Re, which is a joint-venture of Arch’s, as its underwriting is likely to suffer and its investment portfolio decline as well.

It’s going to be an interesting few weeks as we gain a better picture of the true insurance and reinsurance market impact of the coronavirus through quarterly results. Stay tuned to Artemis for news on relevant companies to the ILS space and to our sister publication Reinsurance News for broader re/insurance market results coverage.