Hannover Re increased the volume of ILS and collateralised reinsurance business that it acted as a fronting or transformation service provide for in 2015, saying that this activity is expected to deliver a positive and rising contribution to profits in the future.
For German reinsurance firm Hannover Re one of the responses to the competition posed by the capital markets and insurance-linked securities (ILS) has been to embrace it and position itself as one of the leading service providers to the sector.
The reinsurers activities as a service provider to the ILS industry, through fronting and transformation of risks, has become an increasing contributor to profits as the firm has grown the volume of ILS or collateralised reinsurance premiums it services each year.
In 2014 Hannover Re services around EUR 3.1 billion in limits (incl. reinstatement limits) based on fronting arrangements with approximately 10 ILS investors of funds.
In 2015 that number grew considerably, with Hannover Re reporting that as part of its ILS activities it concluded collateralised reinsurance fronting arrangements for limits amounting to EUR 4.7 billion, an increase of almost 52% on the business facilitated.
Hannover Re noted that collateralised reinsurance saw particularly strong growth in 2015 and that as a result the reinsurer “stepped up its cooperation with selected fund managers in the area of collateralised reinsurance in the year under review and generated attractive margins on this business.”
In its results announcement today, Hannover Re said that the property and casualty reinsurance market remained “intensely competitive” again in 2015. The inflow of capital from catastrophe bonds and ILS is one factor which has led to an oversupply of capital, the reinsurer noted, but here it responds by ensuring it can capitalise on this growing segment as a service provider, utilising its rated, leveraged balance-sheet to assist ILS investors and managers.
“The market for collateralised reinsurance products continued to build substantial capacities and thereby absorbed additional risks that had hitherto been covered on the reinsurance market,” Hannover Re explained.
The growth of ILS and collateralised reinsurance is one of the factors exacerbating pressure on rates, particularly in property catastrophe risks, Hannover Re noted, adding that the soft market has required the reinsurer to adjust its strategy and innovate.
And one way it has responded is with its work in the ILS space, the reinsurer explained; “We are responding to this market situation with a strong emphasis on service, offering individually tailored products – from collateralised reinsurance to catastrophe bonds – and extending our range of services for life reinsurance risks. Over the coming years we expect our ILS activities to deliver a positive and consistently rising profit contribution.”
Hannover Re said that it expects to see ongoing steady growth in demand for insurance-linked securities (ILS), as investors increasingly learn to value the low-correlation that ILS assets have with other financial investments, the diversification this brings and appreciate the relatively attractive returns ILS offers.
As well as the collateralised reinsurance and ILS fronting business, where it rents its rated balance-sheet and services to ILS investors and fund managers, Hannover Re has also seen an increased volume of catastrophe bond business, where it acts as initiator, arranger, structure or fronter.
In 2015 over $1.5 billion of catastrophe bond risk was transferred to the capital markets with the help of Hannover Re, including such transactions as the $700m Alamo Re Ltd. (Series 2015-1), the $300m Cranberry Re Ltd. (Series 2015-1) and the $300m Acorn Re Ltd. (Series 2015-1). Hannover Re also acted as co-manager for the €200m Italian earthquake cat bond Azzurro Re I Limited in 2015.
This activity in the ILS, collateralised reinsurance and catastrophe bond space is bringing meaningful income to Hannover Re from areas of the reinsurance market where pricing has been most affected, and the capital markets are becoming increasingly prevalent as underwriters of risk.
That helps the reinsurer to offset a degree of the competition that ILS has generated, while also ensuring it builds strong relationships with ILS investors and ILS fund managers, positioning it well for benefiting from future ILS market growth while also allowing it to focus its own permanent capital on areas of the market which may be more profitable and suitable to its cost-of-capital.