German reinsurer Hannover Re has increased the size of its capital markets backed K-Cessions quota share retro reinsurance sidecar facility to $680 million for 2020, after sharing 40% of its major catastrophe losses with retrocessionaires in 2019.
In reporting its annual results this morning, Hannover Re revealed that 2019 was a year when it leaned on its retrocessional sources of reinsurance capacity considerably, to help the company manage its major loss load and as a result helped the reinsurer’s P&C underwriting profitability.
In 2019, around 36% of Hannover Re’s major losses were shared with retrocessional sources of reinsurance capacity, which will have included the companies quota share facility K-Cessions, that acts as a kind of sidecar vehicle for the company.
Looking at catastrophe risks alone, Hannover Re reduced its gross major cat loss load by some 40% thanks to retrocession, which those backers of K-Cessions, that include insurance-linked securities (ILS) investors, will likely have assisted with to a degree.
Hannover Re is a relatively significant user of the capital markets for retrocession and one of its key sources of it is K-Cessions.
The K-Cessions retro quota share facility has evolved ever since Hannover Re’s groundbreaking KOVER transaction back in 1994 and has grown steadily.
K-Cessions was just $400 million in size for the 2015 underwriting year and now five years later Hannover Re has increased the size of the multi-line quota share retrocession vehicle to some $680 million for the 2020 underwriting year.
That’s an increase of over 6% from the $640 million K-Cessions that Hannover Re placed for 2019.
The reinsurer previously described K-Cessions as “the backbone of our retrocession program” in an interview with us and it’s clear that it remains a vital component of it, allowing Hannover Re to diversify its sources of protection using the capital markets and ILS investors.
In today’s annual report Hannover Re said, “The importance of the capital market in our purchasing of retrocession protection remains unchanged.”
Explaining K-Cessions the reinsurance firm said, “We were able to renew the protection cover for Hannover Re known as the “K quota share” at an increased level of roughly USD 680 million (USD 640 million) for 2020.
“This is a modelled quota share cession consisting of non-proportion-al reinsurance treaties in the property, catastrophe, aviation and marine (including offshore) lines that has been placed inter alia on the ILS market since 1994.
“In addition to the K quota share we use the ILS market for other protection covers as well.”
So far a significant component of the K-Cessions arrangement for 2020 has been securitised via structured entities, Hannover Re said, amounting to EUR 409.8 million this year, up from EUR 389.0 million.
Clearly demonstrating the value of retrocession to Hannover Re for large catastrophe loss events, typhoon Jebi is reported to have cost the reinsurer a gross impact of EUR 447.1 million, but almost 60% of that was not retained, resulting in a net exposure to this the largest single event of the year of just EUR 183.8 million.
Through the use of efficient retrocession from traditional and capital markets sources, with the K quota share a key component, Hannover Re can mitigate its losses and smooth its earnings, sharing in both its underwriting profits and losses with investors and ILS funds.
K-Cessions sees Hannover Re ceding a well diversified portfolio of non-proportional catastrophe reinsurance treaties from a defined set of territories, as well as some aviation, marine and energy business to traditional and alternative capital providers.
You can read about quota share sidecar like vehicles and transactions in our directory of collateralized reinsurance sidecar vehicles.