Q2 European reinsurance profits as much as 58% down: Deutsche Bank

Profits for European reinsurers are expected to be down by as much as 58% in the second-quarter as a series of events suggests it’s likely firms’ Q2 natural catastrophe budgets will be exceeded, according to Deutsche Bank.

Analysts at Deutsche Bank have warned that the big four European reinsurers, with the exception of Hannover Re, are likely to report reduced profits in the second-quarter of 2016 when compared with last year.

Global catastrophe losses mounted in Q2 as a result of wildfires in Canada, earthquakes in Japan and Ecuador, and storms and flooding in parts of the U.S. and Europe, and reinsurers are expected to shoulder a significant portion of the insured losses.

“Q2 profits will likely be down, especially for Munich Re (-58%), SCOR (-39%) and Swiss Re (-22%),” explains Deutsche Bank, while German reinsurer Hannover Re is expected to ”smoothen profits” with a 2% gain.

Losses in Q2 were substantially higher than in the first-quarter of 2016, and as a result Deutsche Bank explains that the cushion European reinsurers had from a benign Q1 has depleted.

The volume of natural catastrophes and also the impact of several man-made catastrophes in the second-quarter are expected to have an impact on the combined ratios of the big four, says Deutsche Bank.

Impacting SCOR’s combined ratio by 8%, Swiss Re 14.2%, Munich Re 12% and Hannover 12.2%, says Deutsche Bank, which “suggests that we expect the individual Q2 nat cat budgets to be exceeded.”

Analysts at J.P. Morgan Cazenove also suggested that Q2 losses would likely exceed the budgets for many reinsurers, and with analysts at Deutsche Bank expressing the same opinion and a range of Q2 preliminary nat cat loss estimates beginning to come in from re/insurers, highlighting the impacts, it’s looking more likely that Q2 profits will suffer.

However, all reinsurers do have enough of a buffer left from full-year budgets to cope with substantial claims in the second-half of 2016, says Deutsche Bank, and analysts expect full-year budgets to be utilised within a range of 35% to 38%, “which leaves remaining budgets at up to 65% and which we regard as a normal level given the potential hurricane burden in Q3.”

Should the hurricane season be particularly active and result in any landfalling U.S. hurricanes, it will be interesting to see how the heightened losses in Q2, dwindling reserves and an already challenging environment influences reinsurer balance sheets.

Wit the exception of Hannover Re, which despite a loss burden of 12.2% is expected to report a Q2 profit of €258 million ($286mn, and+2% on Q2 2015), Deutsche Bank expects returns to be down for the big European reinsurers.

So should losses continue on a similar trend for the remainder of 2016 reinsurers will be able to rely on cushions from previous benign quarters and accident loss years less and less, suggesting potential for profits to continue the downwards trend.

Deutsche Bank explains that it expects Swiss Re to a report a Q2 profit decline of 22%, totalling $636 million, SCOR to report a 39% dip to €92 million ($102mn), and Munich Re to experience the most dramatic decline of 58%, amounting to €448 million ($497mn).

Times continue to be challenging for reinsurers, and unless a market turning event takes place and rates begin to turn and competition subsides, it’s likely to continue to be difficult to make profits of the past.

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– Q2 European reinsurance profits as much as 58% down: Deutsche Bank.