Reinsurer Hannover Re increased the size of its K-Cession quota share reinsurance and whole account excess of loss transactions for 2016 by $150m, reflecting the availability of attractively priced capital for retrocession.
The K-Cession quota share reinsurance placement, also known as the K series of transactions, is Hannover Re’s largely third-party investor backed retrocessional reinsurance sidecar style placement, through which it shares a portion of its risk and premiums with investors from the ILS and broader capital markets.
The whole account excess of loss placement is a more traditional retro placement, although also involving ILS investor backing, and alongside K-Cessions these make up the backbone of Hannover Re’s retro program.
The reinsurer also has additional stop loss protection and specific retro coverage for lines of business such as marine and energy.
For 2016 Hannover Re has increased the size of its main retrocessional reinsurance protections, as it took advantage of pricing and the appetite among third-party investors to assume quality insurance risk.
The K-Cessions quota share sidecar transaction for 2016 increased by $100m, from $400m to around $500m, while the whole account excess of loss transaction grew from €250m to €300m with the whole account retention remaining the same at €350m.
Henning Ludolphs, Managing Director of Retrocessions & Capital Markets at Hannover Re, told Artemis; “The structure of our retrocession program has been proven to be good over many years and therefore we have not changed it.
“Our K-Cessions quota share remains the backbone of our retrocession program. It goes back to the first ever transfer of catastrophe risks to capital markets, the KOVER–transaction in 1994 (USD 85 m.).”
The K-Cessions transaction saw no real change to the structure of the business covered for 2016, remaining as a fully collateralized capped reinsurance quota share that enables investors to participate in and follow the fortunes of Hannover Re’s business.
The K quota share covers a well diversified portfolio of non-proportional catastrophe reinsurance treaties, from a defined set of territories, as well as some aviation, marine and energy business risks. All the business within the K quota share follows Hannover Re’s underwriting guidelines, ensuring alignment of interests and while there is no specific sidecar vehicle set up it functions similarly to any other quota share reinsurance sidecar.
Hannover Re said that it increased its placements to support its business development, taking into account available support in the market. The reinsurer said that it could have secured even more protection this year, given the appetite for assuming quality risks both among traditional and ILS players, but decided against growing the placement further.
The reinsurer said that it is not a retrocession buyer purely for the sake of it and that as margin payable to its retrocessionnaires has to be earned it only makes sense to secure retro to the extent that the incoming reinsurance business allows for it.
A large portion of Hannover Re’s retrocession program is placed with ILS investors. For 2016 the reinsurer explained that it has expanded its panel of retrocessionaires slightly, but that the majority are long-term supporters of its program. Pricing for the program is reflective of the market trends, the reinsurer also told Artemis.
“We are pleased to have wide ranging support from retrocessionnaires with many of them being long-term supporters. A significant portion of our supports are ILS investors,” Ludolphs said.
ILS and capital markets investors have played a key role in Hannover Re’s K-Cessions and whole account excess of loss transactions over the years, helping the reinsurer to increase both the amount and the efficiency of its retrocessional protection.
The relationship between the reinsurer and the capital markets will no doubt continue, as the firm continues to optimise between own and third-party capital to make best use of available market and investor interest (both ILS and traditional), to gain both retrocessional protection and underwriting capacity support.
Read all about the use of sidecars and sidecar-type structures or transactions in our listing of collateralized reinsurance sidecars.
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