The U.S. P/C industry's reported 3Q20 natural catastrophe losses will be the largest since 3Q17, driven by an elevated frequency of events during the quarter, according to Fitch Ratings. Fitch-rated (re)insurers are largely well-positioned to absorb these recent catastrophes, as carriers' balance sheets were prepared for a potentially strong hurricane season and invested asset values recovered in recent months from earlier unrealized losses.
A number of (re)insurers have pre-announced 3Q20 catastrophe estimates that are material, with losses attributable to a series of events experienced in the U.S. in the quarter, including Hurricanes Isaias, Laura, and Sally, the Derecho Windstorm, and wildfires in California and Oregon. A handful of global (re)insurers may also include losses from the August Beirut explosion in 3Q20 results.
Hurricane Laura represents the largest individual loss event with estimated insured losses between $11 billion-$15 billion. In total third quarter events could sum to approximately $25 billion, moving 2020 to an above average year for natural catastrophe losses.
These losses are exclusive of substantial losses incurred in 1H2020 related to the coronavirus pandemic, which are likely to increase further over the remainder of the year. This accumulation of losses is expected to exceed many individual company catastrophe budgets and further pressure full-year 2020 earnings.
In addition to 3Q20 loss activity, Hurricane Delta the second landfalling hurricane in Louisiana in less than a month is expected to add $1 billion to $3 billion of insured losses to full-year results.
Fitch expects the nature of 3Q losses, and the more moderate insured loss amounts of individual events, leads to the distribution of losses shifted proportionately more towards primary insurers relative to reinsurers, as catastrophe excess of loss reinsurance programs absorb a smaller share of claims. For a number of primary insurers, 3Q20 will represent the largest net retention of catastrophe losses in a third quarter period in the last decade.
Allstate Corporation reported a total of approximately $1.1 billion of catastrophe losses in July and August, exceeding the total of any 3Q period since 2011. Publicly held homeowners' specialist companies that have diversified outside of Florida will report losses from between four and six named storms during 3Q20. Some of these entities may have higher 3Q20 net catastrophe losses than in 3Q17 from Hurricane Irma.
An area of the reinsurance market that is more exposed to the 3Q events, is aggregate reinsurance products that are designed to protect against an elevated frequency of small to medium sized catastrophe events. Travelers Corporation indicated in quarterly earnings commentary that the company at mid-year 2020 nearly reached the annual aggregate deductible on its reinsurance program. Fitch expects other companies that have secured aggregate reinsurance protection will exceed aggregate deductibles and recover losses from these programs in 2020.
The elevated catastrophe losses in 3Q follow a rather modest period of non-coronavirus related catastrophe losses in the first half of 2020. Global natural catastrophe losses were below average for 1H20. Aon Securities estimated insured losses of approximately $26 billion in 1H20, compared to a 10-year (2009-2019) average of $38 billion.
Fitch expects that earnings will remain weak in 3Q20 following first half declines, but capital levels broadly remain strong, with little capital deterioration expected from these events. Reinsurance limits for occurrence catastrophe excess of loss programs are expected to remain largely in place for 4Q20 despite the catastrophe activity thus far during the year. However, the heightened frequency of catastrophe events in 2H20 are likely to continue to put upwards pressure on reinsurance rates at the upcoming January 2021 renewal period.