Global reinsurance firm Hannover Re has increased the size of its regular K-Cession capital markets retrocession placement to $600 million for 2018, as the reinsurer continued to leverage ILS funding as a source of protection and to augment its own capacity.
A year ago Hannover Re’s K-Cession placement, which sees the firm ceding a portion of its book to ILS investors through a collateralized reinsurance sidecar-like structure, was placed at $550 million in size, so the increase to $600 million represents 9% growth.
Hannover Re has been steadily increasing the size of its K-Cessions placement each year, as it deepened its relationships with ILS investors and ILS funds, utilising their capital for retrocession and as a way to earn additional fee income from its underwriting book.
The K-Cession is a quota share reinsurance placement, which has also in the past been known as the K series of transactions. It is a largely third-party investor backed retrocessional reinsurance sidecar-style placement, through which the firm shares a portion of its risk and premiums with investors from the ILS and broader capital markets.
Henning Ludolphs, Managing Director Retrocession and Capital Markets at Hannover Re, spoke with Artemis and described the 2018 K-Cession transaction, “We completed a K-Cession placement, but there is no separate sidecar vehicle set up but it functions similar to a sidecar. The K-Cession remains one of the main components of our retrocession program. It increased from about USD 550 m. to around USD 600 m. which is approx. 42% of the relevant business. Roughly 2/3 of the capacity come from a range of institutional investors with the majority being ILS funds.”
The K-Cession placements offer investors and ILS funds a way to participate in a broad swathe of Hannover Re’s underwriting business, as the transactions cover more than just property catastrophe risks, including some specialty lines business as well.
Ludolphs explained, “The structure and business covered under the K-Cession are basically unchanged. It is a fully collateralized capped quota share allowing the investors to participate in business written by Hannover Re.
“The business is made up of a well-diversified portfolio of natural catastrophe excess of loss reinsurance treaties from a defined set of territories, and non-proportional aviation, marine and energy business. It follows the underwriting guidelines of Hannover Re and thus assures a full alignment of interest.”
Hannover Re also tends to place a separate whole account excess of loss placement for the rest of the relevant business, which is a more traditional retrocession arrangement, however it does tend to also involving some ILS investor backing, and alongside K-Cession provides the core of Hannover Re’s retro program.
Additionally, Hannover Re purchases stop-loss protection and specific retro coverage, for lines of business such as marine and energy we understand.
ILS funds and capital market investors are major participants in Hannover Re’s retrocession program now, making the K-Cession arrangement an increasingly important component of the retro program. As such, the K-Cession vehicle and ILS capital is helping Hannover Re to increase the amount and the efficiency of its retrocessional protection, while also earning fee income from its underwriting.
“K-Cession remains the backbone of our retrocession program and is supported by many long-term partners. It goes back to the first ever transfer of catastrophe risks to capital markets, the KOVER transaction in 1994,” Ludolphs told Artemis.
For more details on reinsurance sidecar investments and transactions view our list of collateralized reinsurance sidecars.
Join us on February 2nd in New York for our upcoming ILS conference
View all of our Artemis Live video interviews and subscribe to our podcast.
All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance video content and video interviews can be accessed online.
Our Artemis Live podcast can be subscribed to using the typical podcast services providers, including Apple, Google, Spotify and more.