Prior-year cat loss creep hits Everest Re, forces reserve strengthening

Bermudian headquartered global reinsurance firm Everest Re is one of the first traditional players to announce the need to strengthen its reserves for the 2017 major hurricane and catastrophe loss events, saying it expects to experience reserve charges of $250 million from prior year events and another $25 million from current year events.

Given the experience of the insurance-linked securities (ILS) fund market, it has been clear that with the escalation of some industry loss estimates for the 2017 hurricanes and the clear hardening of reserves and strengthening of side-pockets by ILS funds that has been seen throughout 2018 so far, this would also impact catastrophe underwriters on the traditional side of the market.

Everest Re said that it expects to report a charge because of net reserve adjustments of around $250 million, after tax, in its Q2 2018 results. The adjustments to reserves are due to prior year catastrophe loss events, Everest Re said, and the figure includes a partial offset from favorable prior year development of non-catastrophe related reserves as well.

The reserve strengthening is related to hurricanes Harvey, Irma and Maria, the reinsurance firm said, largely driven by re-opened claims reported in Q2 as well as loss inflation caused by elevated loss adjustment expenses compared to expectation and their impact on aggregate covers the underwriter had provided.

It is the aggregate covers, both reinsurance and retrocession, that have also been hitting the ILS fund market and collateralized underwriting vehicles in recent months, particularly due to the larger increase in the hurricane Irma estimate.

It’s likely that Everest Re’s collateralized underwriting vehicle Mt. Logan Re Ltd. will also have experienced some loss creep during the second quarter, following increases in loss estimates and the impacts of LAE.

However this has likely been accounted for each month, which is one of the benefits of the ILS model, in that reserve strengthening and updates to loss estimates are generally accounted for in the next months returns.

As well as the reserve strengthening due to 2017 catastrophe events, Everest Re also said it required a further charge of $25 million, after tax, due to current year weather loss events.

Dom Addesso, Everest Re’s President and Chief Executive Officer, commented, “Losses from events like the industry experienced in 2017 are difficult to estimate. The number of re-opened claims and the extraordinary surge in LAE were well above the market expectation. Nevertheless, it is helpful to keep this loss development in context. We are in the business of absorbing volatility and over the last five years we have generated over $3.5 billion in profits from our property catastrophe portfolio. Our portfolio in 2018 is positioned to deliver even better margins. Additionally, the non-cat reinsurance portfolio and the insurance book continue their favorable trends and should produce an excellent result in the second half of the year.”

Will Everest Re set the tone for the traditional reinsurers that underwrite a significant chunk of property catastrophe exposure in the United States?

It’s highly possible. Some of the largest reinsurers may report lower than expected reserve releases this quarter, as claims inflation and loss creep from the 2017 hurricanes means some strengthening is required to their prior year reserves.

Lloyd’s focused re/insurer Beazley also said this morning that its 2017 underwriting year is “reflecting increases in the reserves for the recent catastrophe events” and that as a result it expects to make below average reserve releases throughout 2018.

The complex nature of the three hurricanes, in a year with other major losses such as the Mexican earthquakes and California wildfires, has made it very difficult for those estimating losses.

In particular the loss adjustment expense issues in Florida provides an added layer of uncertainty that is very hard to forecast.

Hence reserve strengthening, or lower releases, could be a trend we see more of over coming reinsurer results seasons.

Also read:

Reinsurers & ILS to assume “virtually all” Irma-related loss creep: Analysts.

Irma related loss creep and divergent ILS fund performance continues.