Arch reports higher than expected Q3 cat losses of up to $75m

Arch Capital Group, the Bermuda headquartered insurance and reinsurance specialist, has estimated that it will suffer between $65 million to as much as $75 million of losses from catastrophe events in the third-quarter, a level higher than analysts had expected to see.

Arch Capital said that its losses will largely come from hurricane Dorian’s impacts on the United States and typhoon Faxai’s impacts in Japan.

The Q3 2019 pre-tax catastrophe loss estimate of up to roughly $75 million is inclusive of recoveries from Arch’s reinsurance and retrocession programs as well as reinstatement premiums, the company said.

Arch noted that there are “significant uncertainties surrounding the scope of damage” for hurricane Dorian and typhoon Faxai, clearly being cautious following the 2017 hurricane loss creep and 2018 typhoon loss creep that reinsurance markets have suffered.

Arch also noted the potential for “other global events” to contribute to its third-quarter catastrophe losses, also citing uncertainty surrounding those as well.

Arch is the first of the major re/insurers to estimate its losses from third-quarter catastrophe events and it’s possible we will see a raft of these disclosures in the weeks running up to Q3 results season.

Analysts at KBW said they had estimated that Arch would disclose losses of around $43.8 million for the quarter, including from hurricane Dorian and typhoon Faxai, which is far below the companies own estimate.

As a reminder, hurricane Dorian is currently estimated as a $4 billion – $8.5 billion industry loss, while typhoon Faxai is estimated as $5 billion – $9 billion (according to data collated by our sister site Reinsurance News).

The analysts said this could be down to Arch being particularly cautious, saying, “We suspect that Arch is incorporating some extra conservatism in its catastrophe loss estimates following Typhoon Jebi’s very material loss creep, and we expect most exposed (re)insurers to take a similar approach.”

It’s a good point, as many re/insurers having been burned by Irma and Jebi loss creep will be looking to ensure that does not happen again, which may result in some ultra conservative loss picks being set for events such as Faxai.

Of course, further down the line that might also boost re/insurers abilities to release reserves, something many are in need of given the general dwindling of reserves of late, providing another stimulus for conservative reserving over recent loss events.

Arch has based its estimate of Q3 catastrophe losses on the information available to it today that it has derived from modeling techniques, assessments of industry exposure, preliminary claims information obtained from its own clients and brokers and a review of its in-force contracts in the affected regions.

The company is clearly taking no chances when it comes to loss creep, warning that these events final losses could “vary materially” from the estimate delivered this week.

Third-party capital investors backing Arch’s private insurance-linked securities (ILS) arrangements and its recently sponsored Voussoir Re Ltd. sidecar vehicle could find themselves supporting any claims the company makes on reinsurance and retrocession provisions.

Arch Capital Group had raised the amount of third-party capital under its management in insurance-linked securities (ILS) related assets to $600 million around a year ago, a figure that has likely risen since and could provide support for its Q3 cat losses to a degree.

There’s likely to be some leakage of losses from the major re/insurers into the ILS fund market as a result, although it does appear more likely to be attritional in nature, not particularly severe, so far.