Elevated catastrophes & $529m Covid-19 losses dent Liberty Mutual

U.S. primary insurer and global re/insurer Liberty Mutual has reported suffering an elevated level of catastrophe losses in the second-quarter, as U.S. severe weather affected the firm, as well as a $529 million loss from the Covid-19 pandemic, all of which sent the company to a loss for the period.

Liberty Mutual reported a net loss of $320 million for the second-quarter of 2020 and net income of $199 million for the first-half, both down on the $397 million and $1.066 billion for the same periods in 2019.

The company reported a combined ratio of 105.4% for the second-quarter of 2020, as catastrophe losses, the impacts of Covid-19 and also some prior year and current year reserve re-estimation, all dented performance for the carrier.

Commenting on the quarter and first-half, David H. Long, Liberty Mutual Chairman and Chief Executive Officer, said, “For the second quarter, we reported a net loss attributable to LMHC of $320 million, reflecting significant impacts from the COVID-19 pandemic and consequent economic downturn as well as above average catastrophe losses.

“Incurred losses for COVID-19 amounted to $529 million in the quarter, with roughly half of these losses related to event cancellation. Based on our size and industry footprint, these losses fall within our expectations for an event of this magnitude.”

Long went on to explain that high-levels of severe storm and convective weather appear to have been the drives of the catastrophe losses for Liberty Mutual, with more than double the level of cat losses booked compared to the prior year.

He explained, “Catastrophe losses of $878 million were up $384 million from the prior year quarter and resulted primarily from a high frequency of severe storm activity and include $147 million of losses related to civil unrest.”

It’s not clear at this time how much reinsurance support Liberty Mutual has benefited from for the catastrophe losses, or for the losses from the Covid-19 pandemic.

However, it is likely that the company will be able to tap into some of its reinsurance provisions to moderate the impact of these losses.

Some of that reinsurance support may come from its third-party capitalised, collateralised reinsurance sidecar vehicle, Limestone Re Ltd.

Liberty Mutual successfully closed on its latest collateralised reinsurance sidecar placement in July, with a $100 million tranche of notes issued by its Limestone Re Ltd. sidecar.

The Limestone Re sidecar, which takes a quota share of certain property related business from Liberty Mutual and cedes it to third-party investors, may have some exposure to certain losses from the pandemic, as well as the catastrophe activity, given the broad use of capital at Liberty. However, we cannot be certain of this and it’s unlikely to be disclosed either way.

Of note is the fact that Liberty Mutual’s Global Risk Solutions reinsurance underwriting has grown some 17.7% for the first-half of 2020, as the company deployed more capital into reinsurance business this year over last. Partly this is due to less of the premiums being ceded, as well it seems as some growth.

Aside from the losses suffered, Liberty Mutual has benefited from the firming in both insurance and reinsurance markets it seems and expects opportunities to emerge going forwards.

Long said, “We are encouraged by the continued market firming in commercial lines which should only accelerate as COVID-19 weighs on industry profitability. Within Global Risk Solutions, we achieved renewal rate increases of 16% in the quarter which is in excess of observed loss trend. The market has been receptive to the need for rate in recent quarters as loss trends remain elevated. We expect this will have a meaningful impact on our core underwriting results going forward.”

The fact that rates are now moving faster than loss cost trends appears very positive for the company and indicative of the stage of the cycle the market now finds itself at.