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Hannover Re ups profit guidance, but is hit by Dorian, Faxai and Thomas Cook

Hannover Re saw strong growth in net income for the first nine months of the year but losses from hurricane Dorian, typhoon Faxai and the collapse of U.K. tour operator Thomas Cook led it to miss profitability targets.

The German reinsurance company's net income for the period stood at €1.00 billion, up 38.3% from the same time last year.

The company decided to raise its profit guidance for the full year to more than €1.25 billion, up from €1.1 billion previously, which it attributed to a better-than-expected performance in life and health insurance.

However, its combined ratio deteriorated to 98.6% from 96.8% previously, which meant it failed to reach its full-year target of 97%. This was partly down to considerable losses incurred in the third quarter.

Loss events

The largest loss events included hurricane Dorian, which cost the reinsurer €186.6 million, typhoon Faxai in Japan which led to a €75.9 million hit, and the collapse of U.K. tour operator Thomas Cook at a cost of €112.4 million.

This meant Hannover Re's quarterly major loss budget of €295 million was exceeded in the third quarter with total large losses amounting to €405.3 million.

"Dorian, Faxai and Thomas Cook were sizeable large losses but overall large loss experience was still below the expected level on a nine-month basis," said Jean-Jacques Henchoz, Hannover Re's CEO.

He also said the results included about €100 million of "loss creep" from last year's Typhoon Jebi.

The damage caused by typhoon Hagibis in Japan, which hit the country in the fourth quarter, is not calculated in these results. The company said it is not yet possible to establish a concrete loss estimate for the event.

It estimated total market losses for Dorian and Faxai to be between €5 billion and €7 billion each.

However, Hannover Re expects the total major loss budget of €875 million set aside for the current year to be sufficient even though the major loss expenditure for the first nine months at €545.9 million was higher than the previous year’s level of €364.6 million.

CFO Roland Vogel said the losses for hurricane Dorian may be "surprisingly high" but the company has a higher market share in the Caribbean than in Florida.

Raising 2020 loss budget

Hannover Re said it would raise its major loss budget for 2020 to €975 million from €875 million, though the company did not highlight a particular area from where it expected increased major losses to come, noting that it did not anticipate an increase its exposure to the U.S. opioid crisis, for instance.

Asked by analysts about the company’s exposure to the California wildfires, which were especially severe in 2017 and 2018, Henchoz was optimistic for the current year.

"We would not expect [a repeat] of what happened in previous years; we expect it to be much lower in comparison in terms of exposure for Hannover Re," said Henchoz.

Vogel said the value of the buildings that had been destroyed so far in the California fires had been at a "relatively low level" compared with the wildfires of 2017 and 2018.

"So none of those fires give us particular concern, but it is early days, the fires can change overnight with wind speed and wind direction, so it is too early to give a final assessment," he said.

The company said there was still sufficient capacity in its large loss budget to cope with wildfires of a scale of 2018.

Henchoz said the €112.4 million loss it experienced on Thomas Cook was manageable.

"A loss of more than €100 million is very significant but fully in line with our risk appetite for specialty clients. We expect from time to time we will experience losses like this," he said.