The first full-year profit warning from a major reinsurance firm has been issued this morning by Talanx owned, German headquartered global player Hannover Re, which said the combined losses from recent catastrophe events could surpass its major loss budget.
All the big reinsurers have budgets set aside for catastrophe losses, as do many smaller players and even some ILS funds that set aside reserves for attritional loss impacts. But when the biggest aggregation of loss events we’ve seen in some years all happen within a matter of weeks, it is to be expected that there will be a severe impact on profitability.
Hannover Re said this morning, “The insurance industry currently finds itself faced with a number of severe natural catastrophe events, the losses from which cannot as yet be precisely quantified; they include Hurricanes Harvey and Irma.”
However, it’s not just Harvey and Irma that the reinsurers and insurance-linked securities (ILS) specialists need to deal with, it’s also the two Mexico earthquakes (yesterday’s being the bigger industry loss it seems) and hurricane Maria’s impacts to the Caribbean.
Hannover Re said that it believes its losses from hurricanes Harvey and Irma will be dealt with within its major loss budget for 2017, which is EUR 825 million.
However, the reinsurer warned today that the impacts of hurricane Maria and the earthquake in Mexico, which it does not have detailed loss information for yet, “will give rise to further substantial strains that will exceed the large loss budget.”
As a result, Hannover Re said that it may not make its EUR 1 billion profit target for 2017, although it does believe it can make its dividend payout as expected.
Hannover Re will likely pass on a greater amount of losses to the investors in its K-Cessions collateralised reinsurance sidecar as a result of its increasing loss burden.
Hannover Re’s parent the Talanx Group also warned of the impact of the reinsurance losses, but added an expectation that it will suffer losses through its industrial risks underwriting business as well.
As a result Talanx said it expects to, “exceed the pro-rata large loss budget amounting EUR 818 million for the first nine months of the financial year in the Reinsurance and Industrial Lines divisions.”
The only other major reinsurer to make a statement on recent catastrophe events was Munich Re, which said that it anticipated falling to a loss in the third-quarter due to the impacts of hurricanes Harvey and Irma.
No update has been given since the earthquake impacted Mexico City, or to factor in losses from hurricane Maria, however it’s safe to assume Munich Re’s losses are growing as well and its full-year profit target is also likely at-risk now.
We’ve yet to hear from Swiss Re and SCOR, while the Bermudian reinsurers have been quiet as well.
The complexity of dealing with an aggregation of such major loss events over just a few weeks means analysing the impact and deriving an estimate of the losses to your portfolio can take time.
We should expect more profit warnings though, both from reinsurers and some ILS players which have broader exposure through collateralised reinsurance and retrocession arrangements.
Markel CATCo warned earlier this morning that the impacts of Harvey and Irma could erase the profitability of its flagship, listed ILS fund this year. The impacts of the Mexico quake and Maria could worsen the picture for broadly exposed ILS players like Markel CATCo.
But this is the job that reinsurers and ILS fund managers are here to do. To analyse, underwrite and be paid to take on risks, being the best equipped and financed to hold them. But then to pay out for losses when disaster strikes.
The last few weeks has been particularly severe in terms of loss aggregation. 2017 is set to be a year where the insurance, reinsurance and ILS industry pays out more than $100 billion in losses. In any year where that happens we should expect to see profit warnings, including from third-party capital players.