Assessing Wildfires’ Impact on P/C Insurers’ 2018 Results

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Fitch Ratings said it expects the November wildfires in California to have some but not great impact on property/casualty insurers’ year-end results and it anticipates limited or no rating actions due to the fires. The rating agency is maintaining stable outlooks on both the U.S. non-life insurance and global reinsurance sectors.

It projects that the overall industry combined ratio for the year will be at 99, including catastrophe losses from the fourth-quarter California wildfires. “While gross insured losses from the fires have been significant, a considerable amount of these losses are expected to be ceded to various global reinsurance markets reducing the net exposure of the domestic primary market,” the agency said.
The California Insurance Department received about 40,000 requests for Camps and Woolsey / Hill fires. As of December 12, the total loss has exceeded 9.1 billion dollars. 92 percent of the total damage was destroyed in the fires due to the fact that approximately 10,564 houses were completely destroyed and other 17,955 residential buildings were classified by partial losses.

The latest loss estimates for November, AIR Worldwide and RMS, which came out of disaster loss models, gave insurance losses in the range of about $ 9 billion to $ 13 billion, and estimated that CoreLogic was even higher than $ 15 billion to $ 19 billion. Fitch analysts believe that damages will reach the highest point of these estimates, based on public announcements made by some insurers.

Many of the largest property insurance writers in California have previously announced estimates of wildfire loss 4Q18 and provided detailed information on the significant losses already paid to policyholders and the reimbursements expected from reinsurance partners. To date, the reported net carrier net losses tend to be relatively limited as the reinsurance programs absorb significant losses.

Fitch said the reinsurance treaties, which are the total loss triggers, are expected to be vulnerable to the fire damage in November following previous catastrophic events that will use some or all of the total precautionary amounts in 2018. However, gross losses from the Camp and Woolsey / Hill fires have been large enough for some insurance companies to recover losses due to disaster-based reinsurance layers, especially with low anchor points.

In the top 10 of California’s homeowners’ insurers, the three companies reported both gross and net losses from November forest fires, showing a significant amount of damage attributed to their reinsurance structures. These insurers are covered by the Farmers’ Insurance Group (net of $ 159 million after tax as reported in the insurance report on December 5), the Allstate Insurance Group ($ 670 million net before tax, 45% 1.2 billion dollars) and Mercury General ($ 37 million). net before tax, gross of 253 million dollars, 15%).

While Allstate reports the largest net of reinsurance loss estimates to date, Fitch estimates that California fires will only take 2% of the company’s full-year combined rate, based on full year 2017 GAAP net earned premiums.
Exposure to forest fires in November led to the legal seizure of Merced Insurance Co., a small regionally concentrated small landlord, and announced that California’s regulatory agencies had gone bankrupt on November 30th. Fitch said the company’s lost experience of fires showed a risk of product and geographic concentration, especially for small companies exposed to disaster.

Insurance linked securities (ILS) market will also suffer from fires. According to Fitch, collateralized reinsurers and ILS funds, which are particularly exposed to the region and participate in reinsurance or reimbursement agreements, constitute the greatest possible loss to the market.

Cal Phoenix Re Ltd. was supported by a third-party trigger, sponsored by the Pacific Gas and Electric Company (PG & E) in 2018, the first disaster-related first disaster bond. Following the fires, a number of lawsuits have been filed against PG & E and the disaster bond is currently very low compared to the company’s potential to be responsible for fires.

Among the top 15 home insurance writers in California, USAA Group and Nationwide Mutual, both support the collective structure disaster bonds, including the risk of forest fire ownership as a closed hazard. Each of the companies, in the risky strata of the reinsurance structure, has seen catastrophic ties in the risky strata, which have fallen below the average values ​​in the secondary market in recent weeks, pointing to market expectations of potential losses, as reported by Artemis.

Fitch said that the timing of losses in the fourth quarter is expected to have an impact on the ongoing January. 1 reinsurance renewal interview was held for primary companies that transfer fire losses to risk transfer partners. For some companies, 2018 represents the second consecutive year in which wildfire losses hit reinsurance strata. When combined with significant third-quarter catastrophic impacts, the above average industry disaster losses can provide momentum for back-up speeds and improved conditions and conditions for reinsurers in 2019.

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