Capital markets play “key role” in Hannover Re’s retro recoveries

by Artemis on April 4, 2018

Hannover Re may have recovered as much as $815 million from its retrocessionaires for losses from the major catastrophe events of 2017 and with the capital markets cited as playing a “key role” in its retro arrangements, it stands to reason that investors will have taken a reasonable sized share.

Hannover Re reported around $2.2 billion (EUR 1.79bn) gross of major losses from 2017, driven by the major catastrophe events and including the largest contributors to the losses, which were hurricanes Harvey, Irma and Maria, as well as the California wildfires, Mexican earthquakes and Cyclone Debbie in Australia.

Of the roughly $2.2 billion gross loss impact, Hannover Re has passed on around $815 million of the loss onto its retro partners, including the capital markets, leaving the company with a net major loss bill of around $1.385 billion (EUR 1.127bn).

Retrocessional reinsurance recoveries assisted the company in managing the impact of 2017 catastrophe events, as it passed on roughly 43% of its hurricane Harvey and Irma losses, 31% of its hurricane Maria losses, and overall an impressive 37% of its gross loss exposure.

Taking a share of these losses will have been investors in Hannover Re’s long-standing capital markets quota share, the so-called K-Cession capital markets retrocession placement which the reinsurer has expanded to $600 million in size for 2018.

Hannover Re sees these arrangements and its other capital markets retrocession sources as vital to its protection program.

“We take out reinsurance with ILS investors,” Hannover Re explained, “The key role played by the capital market in our purchasing of retrocession protection remains unchanged.”

The company “leverages the entire spectrum of opportunities offered by the insurance-linked securities market” both as opportunities to earn fee income, by putting its expertise to work to asisst third-party investors, as well as using it as a source of pure retrocessional protection.

It’s now 25 years that Hannover Re has been placing its capital markets K-Cession and the deal’s predecessors, which makes the reinsurer one of the longest-term users of third-party capital backed retrocession in the market.

As ILS investors prove their worth by taking a share of leading reinsurers losses it’s expected that the firms will increase their reliance on third-party investors over time, growing the proportion of their retro arrangements that hails from institutional investor sources.

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