Fronting & risk transformation for ILS a growth area at Hannover Re

For German reinsurance firm Hannover Re acting as a service provider in the ILS industry, through fronting and transformation of risks, is increasingly becoming a key growth area bringing in incremental revenues and helping the reinsurer to build new relationships.

The collateralized reinsurance fronting business at Hannover Re has seen strong growth in recent years, with 2014 alone seeing the reinsurer fronting over EUR 3 billion of reinsurance business for insurance-linked securities (ILS) investment managers.

Henning Ludolphs, Managing Director of Retrocessions & Capital Markets at Hannover Re, told Artemis; “We are satisfied with the business development of our catastrophe bond transformer activities and of our collateralized fronting activities.

“We started with our collateralized fronting business in 2009. Over the years we were able to increase the business volume in significant steps.”

The growth of the collateralized fronting business at Hannover Re has indeed been impressive, Ludolphs explained; “At the end of 2014 we fronted approx. EUR 3.1 bn in limits (incl. reinstatement limits) based on fronting arrangements with around 10 ILS investors.”

The benefits of using a globally recognised and stable reinsurance firm like Hannover Re for fronting includes that the ILS managers can make use of leverage components offered. In transactions fronted by Hannover Re which use leverage, the ILS manager does not have to put up 100% of the collateral, meaning they can make their assets under management go further.

“We offer certain leverage components either in form of contingent collateral or by assuming certain risk elements ourselves. Generally we only accept remote risks which for our business model means to incur an economical loss with a probability of 1:10,000 years or below,” Ludolphs commented.

The fact that these are very remote risks means that Hannover Re is not unduly leaving itself open to large losses and instead these risks likely complement its overall portfolio and aid with diversification to a degree, while also bringing in fee income.

Alongside the fronting for collateralized reinsurance business Hannover Re also acts as a transformer for catastrophe bond issues. This sees the reinsurer act as sponsor on behalf of insurers or residual market cat bond issuers, as well as also offering private cat bond issuance services such as seen recently with the LI Re series of cat bond lites.

These catastrophe bond related services are also bringing in additional revenue through fee income for Hannover Re, as well as enabling it to build relationships with ceding companies, ILS managers and institutional investors.

Apart from cat bond lites, in 2014 Hannover Re acted as a transformer for the residual market insurer TWIA for a catastrophe bond transactions accounting for USD 400 m of potential obligations.

In 2015 the reinsurer has worked as transformer for catastrophe bonds totaling more than $1 billion of risk capital, acting as a transformer for residual market insurers TWIA and the MPIUA. The reinsurer is also assisting with the latest cat bond to come to market, the Acorn Re Ltd. (Series 2015-1) parametric earthquake risk bond.

Looking forward Ludolphs expects Hannover Re’s ILS fronting and transformation services will continue to play an important and growing role at the reinsurer.

“Going forward we expect to grow the business further but at a slightly lesser pace than in the past. This is a reflection of the ILS market in general which still seems to be growing but more moderately than in past years,” commented Ludolphs.