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Q3 results wrap: Cat losses in focus

Catastrophe events were again the talking point of the P&C earnings season, as last year’s extraordinary third quarter was followed by another above-average period for cat losses that has continued into the fourth quarter.

Major cat events generated sizeable aggregate losses, as Typhoon Jebi inflicted $7bn of claims on the industry, heavily impacting reinsurers. Other major claims included Hurricane Michael, which cost $3bn-$4bn. Typhoons Trami and Mangkhut also inflicted losses.

Other key themes in the quarter included fears around rising loss-cost inflation in the US casualty market and waning pricing momentum in reinsurance lines.


The quarter’s cat events eroded underwriting margins at the remaining independent Bermuda-based (re)insurers: Arch, Axis, Everest Re and RenaissanceRe. Nevertheless, the companies beat consensus estimates across the board, aided by strong investment yields in the period.

Combined ratios were significantly better than in the corresponding quarter of 2017, when the companies were hit by losses from hurricanes Harvey, Irma and Maria and the two earthquakes in Mexico.

Axis was the quarter’s best performer with a combined ratio of 97.9 percent, when considering P&C divisions only. The outperformance was due to a lower exposure to the quarter’s cat events and an improved accident-year ex-cat loss ratio.


At group level, Arch’s combined ratio came in at 82.3 percent, but excluding its mortgage division and sidecar Watford Re, the P&C combined ratio was 99.7 percent for the quarter.

RenRe and Everest Re both posted triple-digit combined ratios, as they had relatively greater exposures to the quarter’s cat events than Arch and Axis.

RenRe took the largest proportional hit with $178mn of pre-tax losses, net of reinstatement premiums, equivalent to 4.2 percent of shareholders’ equity and 33.5 points on the combined ratio.

Gross written premiums (GWP) growth rates were mixed for the group.

RenRe was the only member of the group to report a decrease from the prior-year quarter. 

The Bermudian’s Q3 top line was down 2.3 percent to $625.7mn, almost entirely driven by a 12.8 percent year-on-year reduction in property cat lines to $212.3mn.


Turning to the rest of the group, the carriers increased their insurance books while reporting diverging changes in reinsurance lines of business.


Everest Re continued its push into insurance as the division grew by 7.7 percent to $517.3mn. Jonathan Zaffino, CEO of Everest Insurance, highlighted that the overall increase came despite “our controlled exit of various lines of business”. He added that it represented the 15th consecutive quarter of growth for global insurance.

At Axis, the insurance book’s growth was due to the addition of Novae as legacy insurance premiums were flat year on year.

In reinsurance, the cohort reported mixed top-line changes as the prior-year figures were buoyed by reinstatement premiums stemming from the period’s catastrophes, distorting the year-on-year comparison.



The operating results of specialty insurers were mixed relative to consensus estimates.


Markel and RLI fell short of expectations due to both poor underwriting performance and weak improvement in net investment income.

In contrast, WR Berkley and American Financial Group (AFG) beat earnings per share estimates by 36 percent and 17 percent respectively. Both insurers benefited from short-term fixed income holdings as rates have been picking up. Notably, WR Berkley’s operating performance was substantially boosted by investment results.

All four specialty insurers in our coverage demonstrated top-line growth. The peer group also reported an improvement in underwriting profitability, largely due to tempered cat losses in Q3 2018 compared with the same period last year.


Every insurer in the peer group reported a profitable underwriting quarter with combined ratios ranging from 96 percent to 99 percent. Most notably, AFG posted a sharp improvement in its ex-cat loss ratio due to lower reserve charges associated with run-off operations. After impacting the combined ratio by 7.0 points last year, this item narrowed sharply to 1.4 points, with overall favourable development on prior years.


The improved pricing environment was widely discussed during third-quarter earnings calls. Executives highlighted positive pricing momentum within excess liability and directors’ and officers’ lines. Workers’ compensation was the exception, with pricing under pressure due to the line’s high levels of profitability.


Inflation was another hot topic during earnings calls, as management expressed concerns around the acceleration of loss-cost trends.

For the players in this group that have reinsurance segments, management on the calls pointed to a highly competitive environment, with inadequate risk-adjusted returns despite some evidence of favourable pricing trends.

Commercial insurers 

Third-quarter results for large commercial insurers including AIG, Chubb, Travelers, CNA and The Hartford were mostly positive. Excluding AIG from the mix, the group beat Wall Street estimates by an average of 7.6 percent.

AIG was the only insurer to post a negative result with a loss of $0.34 per share – compared to consensus earnings of $0.06 per share.

The overall improved underwriting results were needed after last year’s cat-heavy third quarter. The major commercial players recorded an average combined ratio of 100.7 percent for the third quarter of this year, an improvement of 15.7 points.


AIG saw the largest underwriting performance improvement with a 32.7-point decrease in its combined ratio year on year. At the other end of the spectrum, Travelers saw a 6.6-point improvement. While a less significant change, the carrier had the lowest combined ratio during the same period last year at 103.2 percent.

Year-on-year improvements largely resulted from lower catastrophe losses. Last year’s third quarter cats added an average of 22.4 points to the combined ratio, whereas this year they contributed 8.2 points. The 14.2-point improvement accounts for roughly 90 percent of the 15.7-point improvement in the average combined ratio year on year.

While improvements were apparent throughout the subsector, AIG still posted poor results with a 124.4 combined ratio after losing $1.6bn to catastrophes. More than half of the insurer’s catastrophe loss resulted from typhoons in Japan. Other losses resulted from Hurricane Florence in North America.

In comparison, other commercial players achieved an average combined ratio of 94.8 percent. While the majority of AIG’s losses stemmed from catastrophes, the firm still fared poorly in comparison to its peers on an ex-cat basis.

AIG’s ex-cat loss ratio of 66.6 percent was 7.2 points above the large commercial average of 59.4 percent.

From an expense perspective, there was little change year on year. AIG and The Hartford reported expense ratio growth of 2.9 points and 0.9 points respectively, while Travelers saw the largest improvement of 0.7 points.

Travelers also reported the greatest premium growth. It grew GWP by 5.6 percent, 2.7 points higher than the group average of 2.9 percent.


AIG and Chubb grew GWP by 2.9 percent and 3.4 percent respectively, while CNA saw GWP shrink by 0.3 percent.

While The Hartford did not disclose GWP, its net written premiums declined by 0.8 percent.

European reinsurers 

Over in Europe, the reinsurers in our coverage posted underwriting improvements in the third quarter of this year for their P&C reinsurance divisions, as the magnitude of natural catastrophe losses was far smaller compared to the same period last year.


The cohort, which includes Munich Re, Swiss Re, Hannover Re and Scor, also experienced top-line gains in their respective non-life segments as they took advantage of rate increases, particularly in lines affected by catastrophes in 2017.

Munich Re posted the biggest improvement as its combined ratio dropped by 60.2 points to 100.7 percent for the quarter. This was mostly due to lower natural catastrophe losses incurred in the period, which added 10.5 points to the combined ratio compared to 61.9 points in Q3 2017.

Meanwhile, Scor reported a Q3 underwriting profit despite losses from two typhoons and Hurricane Florence. The French reinsurer’s combined ratio improved by 38.7 points to 98 percent. The catastrophe ratio was 16.5 percent, 30.9 points lower than in Q3 2017.

Hannover Re’s combined ratio stood at 98.7 percent for the quarter, a 5.3 percent year-on-year improvement. For the nine months to 30 September, the combined ratio was 96.8 percent, slightly higher than the full-year target of 96 percent.

Hannover Re cited “an increasing frequency of smaller and mid-sized losses” over the year.

Swiss Re’s combined ratio for the first nine months of the year was 105.4 percent, an improvement of 37.2 points year on year. It posted a $1.2bn loss from catastrophes compared to $3bn for Q3 2017.

As for premiums, the reinsurers grew their non-life P&C divisions in the quarter, mostly stemming from the 1 July renewals, which mainly involves treaty business in North America, natural catastrophe risks and some business in Latin America and Australia.


Loss-affected lines recorded rate rises, but the overall price increases at the mid-year renewals were muted. For example, Munich Re’s portfolio was up just 0.9 percent, compared to a 0.4 percent price reduction at the July 2017 renewals.

Munich Re reported the largest increase in GWP, which reached EUR5.8bn ($6.6bn) for the quarter, up 21.5 percent year on year. Hannover Re’s GWP climbed by 15.1 percent in the quarter to reach EUR3.2bn, owing to the aforementioned rate increases and growth in its structured reinsurance lines.

London carriers 

In contrast, two of the three London-listed carriers posted declines in GWP for the quarter.

Hiscox’s top line fell by 1.5 percent in the third quarter to $814.3mn. CEO Bronek Masojada warned premiums may continue to fall, saying: “As the market remains challenging, we will remain disciplined, and I expect our growth to moderate over the balance of the year.”


But it was Lancashire that reported the largest drop in premiums of 19.4 percent to $115.2mn. The group’s CEO, Alex Maloney, said top-line growth was offset by reinstatement premiums and timing of multi-year deals renewals, as well as exposure adjustments on prior underwriting year contracts.

The London-listed carrier also reported an underwriting loss for the quarter, with a combined ratio of 135.2 percent, 78.1 points lower year on year.

The carrier’s expense ratio hit 58 percent, an increase of 20.1 points, driven by the lower premium booked during the quarter. Its acquisition costs ratio increased by 7.4 points to 34.4 percent, while its operating costs ratio jumped up 12.7 points to 23.6 percent as the prior-year figure was unusually low due to lower performance-related compensation costs.

Lancashire reported $57.3mn in net losses from catastrophes, excluding the impact of reinstatement premiums. The company said the figure includes attritional losses from events including Hurricane Florence and typhoons Jebi, Mangkhut and Trami.

Hiscox, meanwhile, said it expects a net $125mn of catastrophe losses for Q3.

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