German reinsurance giant Hannover Re said today that the approximately $1.5 billion of catastrophe bonds it has facilitated the issuance of for its clients help to deliver low-risk and attractive margins, while attracting new clients and maintaining existing relationships.
Hannover Re has become a key facilitator for the catastrophe bond and broader insurance-linked securities (ILS) market, as it acts as a fronting sponsor for cat bond issues and also provides fronting services for collateralised reinsurance deals.
By standing between clients and the capital markets, or fronting specifically for investors, Hannover Re enables other parties to use its rated paper to access sources of insurance or reinsurance risk and connect those with the most efficient forms of capital.
For Hannover Re the goal is to earn fee income (the low-risk and attractive margins) while also increasing its relevance among clients, as a conduit to the capital markets. It appears this strategy is also attracting new clients at the same time, that Hannover Re may not have encountered otherwise.
So far in 2018, Hannover Re has acted as a sponsor of five catastrophe bond transactions, totaling $1.5 billion of risk capital issued on behalf of clients, with the most recent being the $125 million SD Re Ltd. (Series 2018-1) California wildfire third-party property liability cat bond on behalf of Sempra Energy.
“This year, we have once again provided protection for our clients against a multitude of risks,” explained Henning Ludolphs, managing director retrocession and capital markets at Hannover Re. “The variety of cedants and risks as well as the record number of issuances underscores our ability to close insurance-linked securities transactions successfully.”
Other key cat bond transactions facilitated with the assistance of Hannover Re this year include: the $500 million FloodSmart Re Ltd. (Series 2018-1) transaction for the NFIP; the $400 million Acorn Re Ltd. (Series 2018-1) cat bond that transfers U.S. earthquake risk away from Oak Tree Assurance Ltd., a Vermont domiciled workers compensation captive owned by the Kaiser Permanente group of health plan companies; the $400 million Alamo Re Ltd. (Series 2018-1) cat bond which is the latest for the Texas Windstorm Insurance Association (TWIA); and the $79 million Integrity Re Ltd. (Series 2018-1) cat bond for American Integrity Insurance.
Totaling just over $1.5 billion, Hannover Re’s transactions account for an impressive 12.5% of 2018 catastrophe bond issuance, according to Artemis’ data on the market.
“With this year’s issuances, we have been able to maintain existing partnerships and attract new clients,” said Jürgen Gräber, Hannover Re’s executive board member responsible for coordination of property and casualty reinsurance and insurance-linked securities. “Through our activities in the insurance-linked securities market, we are able to generate margins that are both low-risk and attractive.”
Hannover Re’s activities in ILS extend far beyond pure catastrophe bonds, with its fronting for collateralised reinsurance also a key driver of new revenues for the reinsurance firm.
Here, the firm predicts more growth of ILS, with the overall ILS market expected to be over $100 billion in size by the end of the year on Hannover Re’s numbers (it already surpassed that number this summer according to Artemis’ data).
“Collateralised reinsurance will continue to grow strongly,” Ludolphs said. “For investor and cedants, collateralised reinsurance is attractive because of its broader range of risks and simpler structure. Collateralised reinsurance has become a success story in itself and we remain strongly committed to it.”
Hannover Re is one of the main reinsurers for fronting these deals, helping ILS funds and investors to access clients who prefer a rated balance-sheet to a fully collateralised approach to their reinsurance or retrocession.
Here, Hannover Re has recognised the important revenues this activity can drive for it and has been embracing its role as an ILS market facilitator for a number of years, when some other major reinsurers remain uncertain and have not got as deeply involved here.
Hannover Re sees itself as one of the top three fronting companies for ILS and collateralised reinsurance over the last few years and it appears this embracing of third-party capital derived revenues is likely to continue.
The low-risk and attractive nature of the margin is a key driver, here Hannover Re can monetise its expertise without taking additional risk onto its own balance-sheet, an attractive and increasingly important revenue driver in the structurally evolving reinsurance marketplace.
The ability to offer clients choice and perhaps see a return from assisting with more of their programs, than just underwriting a slice on their own balance-sheet, while also being introduced to new clients that Hannover Re may never have seen, also helps to drive significant benefits for the firm.