German reinsurance player Hannover Re saw its retrocession capacity providers take more than half of its losses from hurricanes Harvey, Irma and Maria. Following the major losses the reinsurer has freed up capital from its investment portfolio, for tactical considerations at the renewals.
Hannover Re reported EUR 1.6256 billion of gross large losses through the first nine months of 2017, but after the firms retrocessionaires had taken their share the net loss expenditure dropped to EUR 894.3 million.
Investors in Hannover Re’s K-Cessions collateralized sidecar vehicle will have taken a significant chunk of this loss load across the year, especially from the recent hurricanes when retro took more than 51% of Hannover Re’s losses.
Hannover Re said that its gross losses from hurricanes Harvey, Irma and Maria amounted to almost EUR 1.333 billion, but on a net basis after retrocession that figure drops significantly to EUR 650.7 million, so retro providers took 51% of the loss burden for the reinsurance firm.
With hurricane Harvey it was 56% of the losses that flowed through to retrocession capacity providers for Hannover Re, while for hurricane Irma it was slightly more at 58% and hurricane Maria less at just 30%.
The capital markets will have taken a significant chunk of these losses for Hannover Re, helping the reinsurer to manage its results and relieving pressure on its capital through the provision of retro capacity and backing for the K-Cession quota share reinsurance placement and whole account excess of loss placement.
The K-Cessions quota share sidecar is largely third-party capital backed and takes a share of losses on a defined portfolio of property catastrophe and certain specialty risks, while the whole account excess of loss retro arrangement also involves some ILS investor backing but is a more traditional retrocessional reinsurance facility.
Hannover Re reported a net income of EUR 14 million for the third-quarter, down from EUR 304 million a year earlier.
Helping the firm to manage this decline and also freeing up capital to put to work at the January reinsurance renewal, Hannover Re has liquidated a EUR 953.2 million portfolio of equity investments, resulting in a boost of extraordinary income of EUR 223.3 million.
The reinsurer said that this capital release “positively influenced” its group net income for the quarter, saving the firm from reporting a loss, but it also said that it “can use the capital thereby released to act on emerging business opportunities.”
The reinsurer said that the sale of these equities was partly in response to the large losses, but also due to “tactical considerations” which suggests the reinsurer sees opportunities that it would need additional capacity for at the forthcoming renewals.
Hannover Re has previously said that it expects reinsurance rates to rise broadly across the market, returning to levels seen two years ago.
Looking ahead, the reinsurer said, “Recent loss events should cause market conditions to improve again for reinsurers. Rates for catastrophe risks, in particular, are now likely to move higher and should generally prompt positive movements in other lines as well.”
If the world’s largest reinsurers are freeing up capital for opportunities they see at 1/1, it is no surprise that ILS fund managers are largely doing the same.
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