...having already disclosed their results for the fourth quarter.
There are a handful of themes emerging from the early reporters which could be echoed – albeit perhaps more quietly – in London.
With just three listed carriers in London offering quarterly public disclosure into their financials (soon to be four once Conduit Re builds out its book), visibility of London market results is limited, however some of the major themes emerging out of the US and Bermuda can provide a read-across to private companies, or Lloyd’s units of larger businesses.
We outline four takeaways below ahead of London’s reporting season, which kicks off with Beazley on 5 February.
1. Further Covid loss deterioration across property and event cancellation
Carriers including RenRe, WR Berkley and Axis all disclosed further losses from Covid-19 this quarter, while Everest Re also pre-announced Q4 losses which included a pandemic element.
Losses from the Bermudian players suggest Covid-19 claims seeping through international property insurance and property reinsurance books, with both Axis and RenRe highlighting a weighting towards property in their loss reserves.
Meanwhile, Everest Re’s pre-announcement of $76mn of Q4 Covid losses were more weighted towards reinsurance than insurance, and attributed predominantly to third-party lines.
RenRe CEO Kevin O’Donnell stressed that the majority of the carrier’s Q4 Covid numbers reflected losses from the “known unknowns” including BI. He added that the recent UK Supreme Court decision on the FCA BI test case did not have a material impact on its estimate, although he stressed that this reflected its own heavy weighting to personal lines.
Meanwhile, almost the entirety of fresh Covid-19 claims at WR Berkley – equivalent to 1.5 points on the loss ratio – was driven by event cancellation.
With Lloyd’s and London market carriers significantly exposed to international property and property reinsurance, there is potential for further upwards revisions to current Covid loss tallies.
The UK BI decision – which fell largely in favour of insureds – had a more direct impact on the GI market outside of Lloyd’s, however the London specialty market will be indirectly exposed via reinsurance treaties, where disputes are expected further down the line.
Notably, as a result of the UK Supreme Court decision, Hiscox has already upped its 2020 UK BI loss estimate by $48mn – suggesting it expects to be able to cede additional losses to reinsurers at this point.
However, to date it has not been clear how much exposure Hiscox will have to the decision through its reinsurance book, and whether it – along with other reinsurers of UK cedants – will book reserves this quarter to account for that exposure.
Meanwhile, some 41% of Lloyd’s total Covid-19 losses are expected to stem from event cancellation, which are unlikely to have been fully recognised by this point.
Beazley had already pre-warned of further losses as early as September, when it doubled its first-party Covid-19 claims estimate to a net $340mn, driven by conference cancellation losses. This assumes a resumption of event activity in the second half of 2021.
2. Improvement in core loss ratios from rate gains and frequency benefits
A consistent theme among Q4 reporters has been improvement in underlying loss ratios as the industry continues to benefit from rate increases which are outpacing loss-cost trends.
By example, Travelers reported that over 1.5 points of its 3.2-point underlying loss ratio improvement was due to earned rate in excess of loss trend.
Boosting this underlying underwriting improvement is a Covid-driven claims frequency benefit, which was highlighted by Axis and WR Berkley management on conference calls, with the caveat that this would be short-lived.
“There are certainly many parts of the market that have experienced somewhat of a benign period when it comes to frequency,” said Rob Berkley, president and CEO of WR Berkley.
“And our observation is that some may be in for a little bit of a rude awakening hopefully, sooner rather than later when Covid-19 is somewhat behind us, we see frequency return to a more traditional normal, and that severity trend continues to take off like a rocket ship for the foreseeable future.”
The improvement of rates in London has been well documented to date, and will be reflected in Lloyd's and London carriers’ Q4 numbers.
There has been significant rate movement during Q4 in key specialty lines for London, which management at RLI and Axis highlighted during conference calls.
RLI president Craig Kliethermes cited property catastrophe insurance and D&O as areas of considerable hardening in Q4, as casualty rates commanded by the specialty carrier grew 11% during the period.
Axis gave a granular breakdown of Q4 average rate change by line of business in its earnings call, which we outline below.
However, Lloyd’s and the London specialty market are also unlikely to experience the same level of frequency benefit as the carriers in the US, owing to the business mix in London.
With motor typically a mainstay of the UK GI market, and loss frequency offset less pronounced in other casualty lines where London has a greater play, it is probable that EC3 specialty players will not see the same frequency boost to their core margins as their US counterparts.
3. Questions are starting to be asked on the duration of this hardening phase of the cycle
Although companies are reaping the rewards of this harder pricing phase, how long the good times will last has been a point of debate in this quarter’s conference calls.
Notably, Marsh CEO John Doyle said rate increases were starting to show signs of deceleration.
“We are seeing some lines of business where the rate increase kind of flattened out or began to moderate,” he said on Marsh & McLennan Companies’ year-end earnings call.
“That's not to say that prices were down, but the average increase in the fourth quarter wasn't up as much as it was in the third quarter,” he added, citing the broker’s property portfolio in particular.
A look at Travelers’ pricing figures gives some weight to this statement. This analysis from Inside P&C's research team of the US insurance giant’s results shows the pace of quarter-on-quarter rate change in Travelers’ business insurance segment starting to taper off.
Those more bullish on the market include WR Berkley, which said in its earnings release that it saw “no signs” of rate increases moderating and it expected 2021 to continue to provide opportunities for margin improvement.
Meanwhile, RenaissanceRe is targeting an additional $1bn in net written premium in 2021 as a result of better market conditions.
4. Reserve charges have not been as prominent as perhaps expected
The final quarter of any financial year often prompts a deeper annual reserve review at carriers - which can lead towards a tendency for reserve charges to be disclosed in Q4 results. Meanwhile, tactical reasons to recognise bad news before the year is out – such as performance-related compensation – can also prompt charges for the quarter.
However, so far among the early reporters we have not seen a trend towards reserve charges, despite ongoing commentary that the difficulties of social inflation and poor casualty reserving – the hot topics pre-pandemic – have not gone away.
The exception to this is Everest Re, which has pre-disclosed a $400mn reserve charge related to its reinsurance book – mostly from general liability, professional lines and auto liability losses, and for the 2015-2018 accident years.
It is incredibly difficult to predict how companies will choose to approach reserving, but anecdotally executives have privately voiced concerns repeatedly around the strength of market reserves in casualty lines, particularly for the 2014-18 years of account.
And with results in London almost certain to be weaker than for US insurers on the whole, there is likely to be a greater temptation for management teams to "kitchen sink" the year.
The prevalence (or lack of) reserve deterioration in Q4 results and in the quarters to come will be a key influence in how much momentum this current phase of hardening has, and will be keenly watched by the market this quarter.
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