The Hartford’s LA wildfire loss “very likely” to reach per occurrence cover’s first layer

By Michael Loney

Jan 31 - (The Insurer) - Los Angeles wildfire losses are “very likely" to reach The Hartford’s first layer of per occurrence reinsurance protection attaching at $200mn, according to its CFO, who also reported that the insurer achieved a 10 percent cost decrease for this cover at 1.1.

Speaking on an investor call on Friday, CFO Beth Costello said it is too early to estimate the potential losses from the California wildfires.

But she noted that The Hartford’s current reinsurance programs include coverage for wildfires that attaches at $200mn and exhausts at $1.2bn.

“Our reinsurance program does include provisions allowing the combination of events subject to hours and radius provisions,” she said.

The first part of The Hartford’s per occurrence coverage has a first layer with $150mn of protection in excess of $200mn of losses.

“We retained 60 percent of that, and 40 percent of that is reinsured, and very likely we will be in that layer,” Costello said.

The next layer provides $150mn in excess of $350mn of losses.

“We retained 25 percent, and we reinsure 75 percent,” said Costello of the second layer. “Sitting here today, it's not entirely clear that we'll be at that level. We could very well be below that.”

This cover excludes The Hartford’s global re business, which has its own retrocession program attaching when US property losses hit $60mn. “Right now, we'd expect to be below that,” Costello said.

In addition, the carrier's aggregate cover provides reinsurance protection of up to $350mn per event, with all cat losses, except assumed reinsurance business losses, applying towards the $750mn attachment point on the treaty.

Also on the call, The Hartford’s chairman and CEO Christopher Swift said the wildfires will be both a commercial lines event and a personal lines event for the insurer.

“If I look at our personal lines market share for home and auto, because obviously some cars will also be damaged, we're less than 1 percent,” he said.

“We've managed California very tightly I would say over the last seven or eight years, with concentrations of risk that we had in certain zones that we needed to remediate. So personal lines obviously will have some losses, and then our bigger market share is in our middle market book and our small commercial," he continued.

Swift said the reinsurance business “will have a little bit of exposure and then we'll have to see what the Fair Plan does with any assessment”.

Discussing The Hartford’s reinsurance program overall, Costello said that it provides “robust and comprehensive” cover on both a per occurrence and aggregate basis.

“In terms of our catastrophe reinsurance program renewal on January 1, we were very pleased with the placements and terms and conditions for our programs,” she said.

The expiring core per occurrence catastrophe protection was renewed at an approximate 10 percent decrease in cost on a risk-adjusted basis.

Costello said that, based on publicly available information, this “compares favourably with the overall market and speaks to the quality of our underwriting, strong reinsurer relationships and favorable experience”.

“Additionally, we continue to strategically leverage the combination of traditional reinsurance capacity with the sponsorship of our catastrophe bonds Foundation Re to ensure robust and diversified protection for our portfolio,” Costello said.

As of 1 January, after reset of its catastrophe bonds, The Hartford’s per occurrence program provides protection from peak peril up to a gross loss event of $1.5bn.

“The majority of that protection is secured on a multiyear basis,” Costello said. “We also renewed our aggregate treaty under the same structure and at a favourable decrease in cost on a risk-adjusted basis. The continuing strength and diversification of our property, occurrence and aggregate protection aligns with and supports our strategic growth in property writing.”

The Hartford after markets closed on Thursday reported core earnings per diluted share of $2.94 for the fourth quarter, ahead of the $2.64 consensus estimate but down from $3.06 in Q4 2023.

The property casualty combined ratio improved by 1.6 percentage points to 92.1 percent, while the underlying combined ratio improved by 1.4 points to 87.8 percent.

The Hartford in the fourth quarter reported P&C current accident year catastrophe losses of $80mn before tax, which was essentially flat to the prior year and included $68mn from Hurricane Milton as well as net reductions for catastrophes incurred earlier in the year of $18mn.

For the full-year 2024, catastrophe losses totalled $768mn.

2024's fourth quarter included net unfavourable prior accident year development (PYD) in core earnings of $97mn, compared with net favourable PYD of $102mn in core earnings in Q4 2023.

The unfavourable PYD in Q4 2024 was primarily driven by an increase of $141mn related to asbestos and environmental (A&E) reserves after reinsurance related to an adverse development cover.

As previously reported, The Hartford’s management on the investor call revealed that the insurer strengthened general liability reserves by $130mn in Q4 because of higher claim severity for both the 2015-2018 period and more recent years.

In an investor presentation, The Hartford noted that its A&E environmental reserves were reviewed in fourth quarter 2024, resulting in a $203mn increase in reserves before adverse development cover (ADC) for Navigators.

This included $167mn for asbestos and $36mn for environmental. The company ceded to the A&E ADC $62mn.

This is accounted for as a deferred gain on retroactive reinsurance, representing the amount of losses ceded to the ADC in excess of ceded premium paid and up to the cumulative limit of the A&E ADC of $1.5bn, resulting in adverse development of $141mn net of the ADC reinsurance.