Everest Re warns of $150m Covid-19 hit largely to reinsurance book

Global insurance and reinsurance group Everest Re has warned the market that it is reserving for a potential $150 million hit to its business from losses due to the Covid-19 coronavirus pandemic.

While Everest Re said that it expects to report a combined ratio of below 100% across its consolidated reinsurance and insurance operations for the first-quarter of 2020, the combined ratio will be elevated by the inclusion of an incurred but not reported (IBNR) provision for an estimated $150 million of pre-tax net first party losses from claims due to the coronavirus pandemic.

The company said that the lions share of these losses are expected to hit its reinsurance segment, one analyst estimated as much as a $130 million reinsurance $20 million insurance split.

Everest Re said that this early reserving for the potential losses it may suffer from Covid-19 is “consistent with our philosophy of recognizing and reacting to expected losses on a timely basis.”

As a result, the re/insurer is recognising this IBNR reserve in its Q1 results and will then track the pandemic related losses as a separate and ongoing event.

Everest Re President & CEO Juan C. Andrade commented, “As the situation surrounding the Covid-19 pandemic continues to evolve, our thoughts are with everyone who has been impacted around the globe. Everest remains committed to supporting our clients, communities, and trading partners. These are unprecedented times, and our first priority is the safety of our employees, business partners, other stakeholders and their families.

“Our entire organization has been working remotely, continuing to serve our customers with the same high level of service that they have come to expect. Our capital position remains a source of strength, with high quality invested assets, significant liquidity, low financial leverage, and a low operating expense ratio. Our diversified global platform with its broad mix of products, distribution and geography is resilient.”

In addition Everest Re said that it expects to report net investment income of $148 million for the first-quarter of 2020, which analysts in the majority noted as only slightly behind their forecasts for the period.

The reason being that Everest Re’s investment returns can run delayed, as investment income from limited partnerships tends to be subject to a reporting lag of around one-quarter.

“As such, the results from these investments during the first quarter of 2020 will be reported in the second quarter 2020 net investment income,” Everest Re warned and analysts expect that much of the recent financial market volatility will be included in the next quarter’s results.

Everest Re said that since the pandemic began it has been actively managing its investments, repositioning the portfolio to move up in fixed income credit quality and lower its equity exposure.

It seems unlikely that an early estimate for the full hit from the pandemic will prove totally accurate and sufficient to encompass the entire loss, but by making a reserve on an IBNR basis early on Everest Re is trying to prevent further sharp hits to profitability further down the line.

Important to note that it is IBNR and first party losses only, so the total claims burden could of course be higher. But this move will help to position Everest Re to more accurately reflect the performance of its business going forwards with less drag from the pandemic claims, perhaps.

It’s interesting to note the different strategies, in terms of some re/insurers only recognising the few claims that had already been filed in Q1 and others like Everest trying to recognise as much of the total pandemic loss as possible up front.

At this stage it’s not possible to understand whether Everest Re could cede any of the losses to its Mt. Logan Re Ltd. third-party capital backed collateralised reinsurance sidecar-like vehicle.

The re/insurer has not given any clarity on what lines of reinsurance business it expects the claims from, but if property features then there will always be a chance of some claims falling to arrangements that are third-party capital backed.

There is a chance Everest Re may have some other sources of retrocession that respond to the losses from the pandemic, but again at this time it’s not possible to forecast where the losses will ultimately fall.