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Q2 wrap: cat losses and reserves

P&C (re)insurers benefited from another quarter of below-average catastrophe losses, as global cat events were absent in the three months to 30 June 2017.

Q2 cat losses

US cat losses cost insurers more than $4.2bn in the period, relatively in line with the second quarter of last year when insured losses were approximately $4.4bn, according to Aon Benfield's Impact Forecasting unit.

Meanwhile, non-US cat events were way down on last year's $9.0bn of insured losses, which were driven by earthquakes in Ecuador and Japan that cost insurers more than $5.0bn, as well as the Canadian wildfires, which generated $3.6bn of claims.

The most significant event in Q2 2017 was a hailstorm that hit Colorado in May, when golf ball- and baseball-sized hail struck buildings and cars, generating more than 150,000 car insurance and 50,000 homeowners' insurance claims.

The Rocky Mountain Insurance Information Association has estimated insured losses from the hailstorm were $1.4bn.

Aon Benfield also noted that major hailstorms across Colorado, New Mexico, Texas and Oklahoma caused at least $1.8bn in insured losses.

Looking at the impact of Q2 cat losses on the underwriting performance of our coverage universe, nearly all the carriers reported a significant reduction in the cat claims ratio to net earned premiums (NEP).

Hannover Re, Hiscox, Markel, Validus and RenRe recorded no cat losses in the period, versus the cat ratio adding more than 10.0 points in some cases in the prior-year period.

The majority of (re)insurers' cat ratios more than halved to mid-to-low single-digit levels, and were the main reason for their respective combined ratios reducing year-on-year.

For example, Axis was exposed to cat losses stemming from the severe US weather events and reported a cat ratio of 5.1 percent, but this was 6.4 percentage points below the Q2 2016 level.

Munich Re also took hits from the US hailstorms that took its cat ratio to 6.0 percent for the quarter, less than half the corresponding result a year before.


Reserve releases continue to soften

The issue of shrinking reserve buffers was present in second quarter underwriting results, continuing the trends that emerged in the last quarter of 2016.

Most carriers posted lower favourable prior-year developments relative to net earned premiums (NEP) compared to the same period in 2016, providing further evidence of the P&C industry's unsustainable use of reserve releases to widen underwriting margins.

Reserve releases

In Bermuda, four out of six carriers posted reduced contributions from reserve releases, which led the group's prior-year development ratio to decrease by 80 basis points to 5.4 percent of NEP on a weighted average basis.

Validus reported a 31.1 percent year-on-year decrease in reserve releases to $43.3mn for the quarter, which lowered the combined ratio by 6.9 points, 4.1 points less than the reserve contribution in Q2 2016.

Half of the erosion stemmed from the insurer's Lloyd's segment - Talbot - where favourable developments halved year-on-year to $15.9mn.

And Arch's reinsurance segment posted releases of 12.3 percent of NEP compared to 21.7 percent in Q2 2016, which was the main culprit behind a 2.5 point drop in the company's reserve releases ratio to 6.4 percent.

Among the US specialty carriers, only Markel and WR Berkley reported marginally higher reserve contributions in the quarter.

Navigators, meanwhile, experienced unfavourable prior-year developments of $8.0mn stemming from the international and global reinsurance divisions. This added 2.7 percentage points to the carrier's Q2 combined ratio.

CFO Ciro DeFalco attributed the strengthening to prior-year losses in marine and large claims in professional liability, as well as one large loss settlement in global reinsurance.

And Argo reported adverse developments in its London division emanating from property, liability and specialty lines, but these were offset by releases in its US segment, according to CFO Jay Bullock.

This led to the company's reserve releases lowering the combined ratio by just 30 bps, versus 3.7 percentage points in the same period of last year.

Across the ocean, three out of four global reinsurers posted reduced contributions from reserve releases in the quarter: Hannover Re, Scor and Everest Re.

Hannover Re, whose reserve guidance is around EUR50mn ($59mn) of releases per quarter, posted no developments in the three months to 30 June, but strengthened its Ogden-exposed reserves by EUR291mn in H1.

And in London, Novae reported unfavourable prior-year developments of $1.7mn due to lines placed into run-off, or 0.5 percent of H1 NEP, compared to having released 4.0 percent a year before.


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