XL sees shift to “realistic and sustainable pricing” after $1.48bn of Q3 losses

Mike McGavick the CEO of insurance and reinsurance company XL Group Ltd. and the XL Catlin brand believes that the market will shift towards “more realistic and sustainable pricing for the risks undertaken,” following the catastrophe losses of the last quarter which are set to cost the company around $1.48 billion.

XL’s estimate of losses from Hurricanes Harvey, Irma and Maria is put at $1.33 billion, while its total third-quarter 2017 catastrophe loss bill will be nearer to $1.48 billion. These figures are after “meaningful” reinsurance recoveries, reinstatement and adjustment premiums and redeemable non-controlling interest, but before tax. After tax the number will come down to $1.35 billion.

The company clearly feels that the level of losses suffered by the market will be sufficient to move insurance and reinsurance pricing in the right direction and the fact McGavick mentions “realistic and sustainable” rates is encouraging, as it suggests a desire to be paid commensurate with the risks taken on, rather than seeing payback.

“As for market conditions, risk awareness has changed due to these events, and this in turn should cause the market to move towards more realistic and sustainable pricing for the risks undertaken,” McGavick explained.

XL sees the private insurance and reinsurance market loss for Hurricanes Harvey, Irma and Maria as being in the range of $75 billion to $90 billion, with each storm contributing roughly 25%, 40% and 25%, respectively, to its loss estimates. The other 10% of its loss estimate is related to all other catastrophe events in the third-quarter, including the Mexican earthquakes and Typhoon Hato.

Losses are evenly split between XL’s insurance and reinsurance businesses, the company said and it believes that it has ample catastrophe reinsurance protection in place for 2017 and 2018, and beyond due to its in-force catastrophe bonds, some of which provide coverage through 2019.

So far XL’s Galileo and Galilei catastrophe bonds have not been impacted by recent events, except for on a mark-to-market basis. There is still the potential for losses there, should PCS’ loss estimates for Harvey and Irma rise significantly, but it is beginning to look less likely these cat bonds will pay out at this stage.

But third-party capital market investors and ILS funds will likely be paying their share of XL’s claims through collateralized reinsurance and retrocession arrangements. Additionally, the ILS fund operations of XL Group, New Ocean Capital Management, will also be facing losses from its collateralized participation in affected reinsurance programs, possibly including XL’s own losses.

McGavick commented on recent events and their impact on XL; “Our hearts break at the havoc caused by these events; the terrible pain and anguish suffered. We are proud of our people, some of whom have had their own losses to deal with, who are working tirelessly with our partners to help our clients in these difficult times.

“And, as ever, the problem of underinsurance is again laid bare, afflicting especially those already less well off. It is appalling, and all of us with expertise to offer must bend our minds to solving these systemic failures.

“In terms of the effects on XL itself, given the specific nature of the events themselves our estimated losses are largely in line with our expectations, and our capital strength and talented teams ensure that we remain positioned to continue solving the risk needs of clients and brokers.”