Profit Warnings

Storms Now Buffeting German Insurers

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Flooding in Houston after Hurricane Harvey. Source: Reuters

An old aphorism holds that “all bad things come in threes,” but for Europe’s reinsurance business, there already have been five costly natural disasters in the past few weeks in North America and the year still has three more months to run.

It’s always a rather cold but necessary calculation in light of the hundreds of lives lost and tens of thousands of homes destroyed in this series of disasters. Investment bank Morgan Stanley said it expected insurance industry losses totaling around €84 billion ($100 billion) when the final accounting comes in from what has been a devastating month.

The fallout in Germany has been swift. Reinsurer Hannover Re and its parent company, Talanx, became the latest companies to issue a profit warning on Thursday, following a similar warning last week from Munich Re.

The firms say the losses should not affect dividend payouts.

It’s an unhappy turn of events for an industry that had been banking on an easier year. Major damage claims were at their lowest in years over the first six months of 2017 and the two major insurers had continued to sound optimistic up until just a few weeks ago. Then came Hurricane Harvey, which flooded Houston, Hurricane Irma, which hit the west coast of Florida, and Hurricane Maria, still barreling through the Caribbean and expected to hit the US mainland. In addition, there could be substantial property losses in the two earthquakes which have jolted Mexico, JP Morgan said.

Talanx, which is based in Hannover, said losses from Hurricane Maria and the latest earthquake in Mexico will exceed the €818 million the company had set aside to cover claims. That could put its €850 million profit target in jeopardy depending on “the development of the large loss burden up to the end of the year,” the company said, though it promised a dividend for shareholders still equal to last year’s payout.

A week earlier, Munich Re, which is the world’s largest reinsurer, warned that the third quarter was likely to show a loss and the firm might not achieve its own profit target of around €2.0-2.4 billion for 2017. That statement was issued before a 7.1 magnitude earthquake near Mexico City toppled buildings.

Reinsurance is insurance that property insurance companies buy to protect themselves against a catastrophe. Because of the devastating damage from previous storms, an estimated 50-75 percent of the insured property in Florida is covered by reinsurance policies issued by companies like Munich Re, Hannover Re and Swiss Re. according to investment bank Keefe, Bruyette & Woods.

In contrast, the bank said that reinsurance in Houston only covered about 25 percent of the losses, so the European firms were relatively less harmed by Hurricane Harvey, even though there was extensive flooding damage. Floods are not covered by private insurance in much of the US, but by a government-backed program.

William Hawkins, an insurance analyst at US investment bank KBW said an industry consensus was that losses in Houston totaled around €25 billion, while Hurricane Irma did less damage than originally feared, now estimated at €41 billion. Irma had been expected to devastate Miami, but changed course and inundated less populated areas on Florida’s west coast.

Morgan Stanley said in a note that total economic losses in the Mexican earthquakes was likely to be in €1-8 billion range, with reinsured losses “to be significantly below the level of economic losses.”

Thorsten Wenzel, an analyst with DZ Bank, said the profit warnings were not surprising given the huge destruction from recent events. He said the reinsurance firms may try offset some of the losses using reserves. And no doubt they’ll be hoping like the rest of North America that the remainder of the year is a quiet one.

Carsten Herz is Handelsblatt’s leading correspondent covering the insurance industry and is based in Frankfurt. Charles Wallace, an editor in New York, adapted this story for Handelsblatt Global. To contact the author: herz@handlesblatt.com and c.wallace@extern.handelsblatt.com

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