Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Big four reinsurers may exceed Q3 catastrophe budgets on Faxai


Typhoon Faxai’s impacts on the global insurance and reinsurance industry is expected to push the big four reinsurers beyond their quarterly natural catastrophe budgets for the third-quarter, with Swiss Re anticipated to take the largest hit given its market share in Japan.

down-arrow-profitAnalysts at Deutsche Bank said that they expect all of the big four European headquartered reinsurers, so Hannover Re, Munich Re, SCOR and Swiss Re, will exceed their catastrophe budgets for the quarter when they report their results in the coming weeks.

That suggests many of the mid-sized and property catastrophe specialists may as well, as losses from hurricane Dorian and typhoon Jebi combine to dent the quarter.

As a result, third-party capital investors in sidecars and quota share vehicles operated by these reinsurers can expect to take their share of the loss, given the insurance-linked securities (ILS) vehicles run by the major reinsurers are designed to help out when losses exceed forecast.

Given the experience the industry has had with 2018’s typhoon Jebi there is some nervousness around Faxai and whether it could drive a larger than anticipated loss as well.

The latest industry loss estimate from RMS suggests a toll for the insurance and reinsurance sector of between $5 billion and $9 billion, at which level major reinsurers will take a reasonably large hit given their strong market shares in Japan.

Swiss Re is particularly exposed, given its leading market share in the country.

Analysts at Deutsche Bank estimate that Swiss Re will take an 8% to 10% share of the loss from typhoon Faxai, given its stature in Japan, while Munich Re is expected to take around 3%, and Hannover Re and SCOR around 1.5% each.

At the mid-point of RMS’ estimated range, or $7 billion, it suggests that Swiss Re could face a gross loss of between $560 million and $700 million from typhoon Faxai, while Munich Re could face $210 million and Hannover Re and SCOR $105 million of losses each from the storm.

The loss from typhoon Faxai will be added to losses from hurricane Dorian, plus impacts from other smaller severe weather events during the quarter and some man-made satellite losses.

The Deutsche Bank analysts believe that for Dorian the reinsurers would again be led by Swiss Re with a 3% share, followed by 2.5% for Munich Re, 1% for Hannover Re and 0.7% for SCOR.

At an industry loss estimated between $4 billion and $8.5 billion, hurricane Dorian is not expected to be as large an event for the industry as Faxai, but together they will make a significant dent in reinsurers budgets for catastrophe losses.

Dorian and Faxai are expected to be “the key natcat loss drivers” the analysts explain.

In addition, two man-made loss events will also eat into budgeted loss amounts for Q3, the analysts believe with the loss of Chinese satellite China- sat-18, and the European Vega rocket explosion, which resulted in the loss of the FalconEye1 satellite for the United Arab Emirates (UAE), both expected to cost the insurance and reinsurance market between $200 million and $500 million each.

These losses would likely be well spread among reinsurers, meaning the big four Europeans would each be expected to take their share.

With quarterly reporting season fast approaching, the analysts explained, “For the reinsurers, we expect quarterly natcat budgets to have been slightly exceed- ed, which is on top of more normal man-made losses. This should put Q3 earnings at a more normal level.”

With catastrophe losses coming in above budgeted levels we’d expect to see some retrocessional support and erosion of third-party capital protection these major reinsurers have in place.

As a result, it’s likely that some of the collateralised reinsurance sidecar vehicles, such as Swiss Re’s Sector Re, Munich Re’s Eden and Leo, Hannover Re’s KCessions, will face some attrition due to the losses in Q3.

In addition, any private quota shares or ILS deals these major reinsurers might have as part of their retro programs could also be exposed.

However, it will take some time for the full extent of any losses to the ILS sector to be understood.

Also read:

Dorian & Faxai may partially erode some ILS deductibles: Twelve Capital.

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