Hannover Re generates “attractive margins” from ILS & collateralised

by Artemis on March 9, 2017

Global reinsurance firm Hannover Re continued to generate revenues from its activities in the insurance-linked securities (ILS) and collateralised reinsurance market, as its premium volume from that business remained relatively stable in 2016.

Hannover Re reports that it generated “attractive margins” from facilitating ILS and collateralised reinsurance in 2016, with its gross premiums written under structured reinsurance and ILS coming in at EUR 1.309 billion for the year.

In fact, the structured reinsurance and ILS area at Hannover Re is one of the main areas of premium growth, with the company seeing a clear opportunity to increase premiums in some markets with the help or backing of third-party investor capital.

Hannover Re uses the full spectrum of ILS solutions and third-party capital, both for its own retrocessional protection and as a way to underwrite risks using investor capital while earning fees for its facilitation.

The reinsurer also works alongside leading ILS fund managers to provide fronting or risk transformation solutions, enabling ILS managers to take advantage of its balance-sheet leverage, to a degree, and rated paper, an area of its business that has been growing in recent years.

Investors will be pleased with the results Hannover Re has achieved in this segment of its business, with the combined ratio across the structured reinsurance and ILS premiums written in 2016 coming out at 97.3%, which is lower than the 98.4% seen in 2015.

As a result, Hannover Re’s operating profit from this segment increased to EUR 73.9 million, up from EUR 57.4 million, all of which suggests that the third-party investors in the ILS vehicles Hannover Re operates, such as its K-Cessions, may have seen a better year as well.

Hannover Re increased the size of its K-Cessions retrocessional reinsurance quota share vehicle for 2016 to $520 million and again for 2017 to $550 million, with the coverage being across a greater percentage of the subject business included.

Hannover Re has been using its K-Cessions approach to sharing risks with ILS investors as a way to source retrocessional protection for more than 20 years and the vehicle now covers a modelled quota share cession made up of non-proportional reinsurance treaties in property, catastrophe, aviation and marine (including offshore) risks.

Hannover Re also uses the ILS market in other ways for its own protection, aside from K-Cessions and places special significance on the fact this cover is fully collateralised.

Hannover Re provides some colour on how it thinks about ILS and working with third-party reinsurance capital.

The company explained; “The strong demand on the capital market for (re)insurance risks remains undiminished, particularly given the diversifying nature of such investments. The worldwide volume of risks transferred to the capital market continued to grow in the year under review.

“Through our activities we leverage the entire spectrum of opportunities offered by the so-called insurance-linked securities market. On the one hand we take out reinsurance with ILS investors, while at the same time we transfer risks for our customers to the capital market as a service.”

The reinsurer noticed the shift towards collateralised reinsurance during 2016, saying that the; “Currently available capital exceeds the available opportunities for making new investments in catastrophe bonds,” and that this has “Prompted investors to look for other means of investing in the reinsurance sector.”

As a result collateralised reinsurance grew market-wide, Hannover Re notes, adding that for it; “A modest decline in the area of catastrophe bonds was more than offset by collateralised reinsurance business.”

The reinsurer said that during 2016 it; “Maintained its cooperation with selected fund managers on a consistently high level in the year under review and generated attractive margins.”

Hannover Re also utilised the capital markets as a way to source life retrocession as well, as it; “Successfully transferred further life reinsurance risks to the capital market.”

Hannover Re is completely bought into the use of the capital markets alongside its own balance-sheet, having leveraged third-party capital and ILS structures since the mid-1990’s and seeing itself as a “pioneer” in this respects.

By acquiring efficiently priced retrocessional reinsurance, and earning fee income through underwriting and fronting using investor capital, the reinsurer is better able to navigate the most challenging areas of the reinsurance market.

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