Hannover Re sees low risk attractive margins from ILS business

Reinsurance firm Hannover Re has continued to expand its activities in the insurance-linked securities (ILS) transformer space, fronting and working with both existing and new clients in recent months, to secure what the company sees as a source of low risk and attractive margins.

Major reinsurers increasingly find they can work alongside existing or new cedants to help them access the capital markets, acting as a fronting reinsurer and transformer to bring collateralized reinsurance capacity to them through the issuance of catastrophe bonds.

Hannover Re has been established in this space for some time, but in the last year feels it has benefited from new client relationships and helping existing counterparties to access ILS investors more seamlessly again.

For the first time this year, the reinsurer has worked with client American Integrity Insurance Company of Florida (AIIC) to help it transfer Florida named storm and severe thunderstorm risks to capital market investors.

The transaction, named Integrity Re Ltd. (Series 2017-1), saw $210 million of capacity raised from institutional investors in a transaction covering American Integrity for a roughly three year term.

Hannover Re has also worked with two existing counterparties to bring new cat bonds to market, in the $400 million Alamo Re Ltd. (Series 2017-1) transaction for the Texas Windstorm Insurance Association (TWIA), and the $350 million Cranberry Re Ltd. (Series 2017-1) for the Massachusetts Property Insurance Underwriting Association (MPIUA). Both of these transactions also have a maturity of approximately three years.

Hannover Re sees this business as complementary to its traditional reinsurance work, enabling the firm to play a key role in transactions which help clients to access the capital markets.

“We are delighted that with our three latest transactions we have been able to not only maintain existing partnerships but also acquire a new client. In recent years we have substantially enlarged our market share of transformer business with the placement of additional exposures in excess of USD 2.5 billion”, Jürgen Gräber, the responsible member of the Executive Board, explained.

Hannover Re feels that this side of its business helps it to “generate margins that are both low-risk and attractive.”

As well as working with clients, to help them access the capital markets, Hannover Re has also long been a user of ILS capacity to lay off some of its own risks, helping investors to share in its underwriting performance through structures like its collateralized reinsurance sidecar and the firm also invests in cat bonds through its Leine Investment entity.

For reinsurers which often are said to face pressure due to capital markets activity, being able to work with the ILS investor base and help its clients access it is beneficial, in terms of bringing in fee income, as well as helping it to play an increasingly important role in clients risk transfer arrangements.