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High Cat Loss to Dent RenaissanceRe's Underwriting Margins

Zacks Equity Research
·4 mins read

RenaissanceRe Holdings Ltd. RNR recently announced that it anticipates a negative net impact of around $325 million on its operational results owing to occurrence of several catastrophe events in third-quarter 2020.

Although RenaissanceRe still expects to report decent net income available to common shareholders in the third quarter, it anticipates reporting operating loss attributable to common shareholders in the same quarter.

The primary reason behind the company’s estimation is the occurrence of numerous catastrophe events including hurricanes and wildfires in the third quarter, which traditionally bears the brunt of catastrophes each year. It has to be noted that the hurricane season typically starts in June and lasts through November during a year, gathering strength in between mid-August and late October.

Now coming to the numerous catastrophe events. While Hurricane Isaias made landfall on North Carolina this August, the unusual derecho storm severely impacted parts of the U.S. Midwest in the same month itself. Notably, the arrival of the Hurricane Laura, which had made a landfall on the U.S. Gulf Coast on Aug 27, aggravated the scenario further. It is worth mentioning that Hurricane Laura has been the most severe storm so far this year, which wreaked havoc across Louisiana and Texas. Compounding the misery, Hurricane Sally built up last month and lashed Florida and Alabama.

Together with these several storms, wildfires in California, Oregon and Washington also contributed to the widespread destruction caused by these back-to-back catastrophe events. These events are likely to have impacted the company’s personal and commercial lines of business across the affected areas in which it operates.

Moreover, there seems to be further indication about strong activity still left during this hurricane season, per the updated forecast issued by the National Oceanic and Atmospheric Administration (NOAA) on Aug 6. NOAA has cited the 2020 Atlantic hurricane season to be ‘extremely active’ and forecast the occurrence of 19-25 named storms, among which three to six will be major ones, amid this period.

Impact on Bottom Line

It is a well-known fact that the business of a property & casualty (P&C) insurer remains vulnerable to severe catastrophe loss, and RenaissanceRe is no exception to the trend. This, in turn, is not only likely to render volatility to the company’s underwriting profitability but also act as a drag on its earnings. Case in point, the company’s underwriting income declined 13.5% in the first half of 2020 from the year-ago period.

Furthermore, unprecedented catastrophe led to surge in net claims and claims expenses incurred by nearly 60% in the second half 2020 compared with the prior-year period.

Other P&C insurers including The Allstate Corporation ALL, The Progressive Corporation PGR and Chubb CB also have exposure to areas where one or more of the abovementioned catastrophe events have wreaked havoc, which is likely to dent underwriting profitability of these insurers.

Shares of RenaissanceRe, which carries a Zacks Rank #3 (Hold), have lost 8.1% in a year compared with the industry’s decline of 4%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Insurer’s Strategies to Cope With Cat Losses

Despite the fact that high degree of losses caused by catastrophes is a serious concern, insurers have been implementing price hikes to ensure uninterrupted claims payment. Also, reinsurance covers are likely to help RenaissanceRe weather losses.

The company has also been increasing investments by 3.3% in catastrophe bonds at second-quarter end from the 2019-end level. These bonds, which generally fetch higher returns, are issued by reinsurance firms for somewhat dodging the risks arising from the havoc unleashed by hurricanes, fires, floods and earthquakes.

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RenaissanceRe Holdings Ltd. (RNR) : Free Stock Analysis Report
 
The Allstate Corporation (ALL) : Free Stock Analysis Report
 
The Progressive Corporation (PGR) : Free Stock Analysis Report
 
Chubb Limited (CB) : Free Stock Analysis Report
 
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