Hannover Re’s K-Cessions sidecar could have Ukraine exposure

Global reinsurance company Hannover Re could find some support from its capital markets backed K-Cessions quota share sidecar facility for certain non-war specialty lines exposures to the ongoing conflict in Ukraine.

Speaking during a briefing today, Sven Althoff, a member of Hannover Re’s executive board focused on property and casualty reinsurance, discussed the potential exposure that the reinsurer may face from the ongoing crisis in Ukraine and Russia’s invasion of it.

Althoff explained that there remains enormous uncertainty over potential exposures, but highlighted certain specialty lines such as aviation and marine as areas of the reinsurance market that losses could come through.

He disclosed that Hannover Re’s flagship quota share structure, the capital markets-backed K-Cessions retro reinsurance sidecar facility, may be one place that the company could call on retrocessional support for any Ukraine crisis related losses from specialty classes.

Althoff explained that, at Hannover Re, “We are buying reinsurance and retro on both aviation and marine both on an all-risk and also on a core basis, but with different levels and with different limits.”

Continuing to explain, “So, in case we should have significant losses coming coming out of this conflict, then there would be some retro protection helping us.”

Adding that, “As you know, aviation and marine excess-of-loss are also part of our K quota share, so there may also be recoveries under K, particularly on the non-war side.”

The K-Cessions structure covers natural catastrophe exposures and some specialty lines of reinsurance for Hannover Re, with significant capital market investor support involved, and while the sidecar was renewed at a downsized $450 million for 2022, it provides a core retro protection for the company.

Non-war losses would likely come from sanction related impacts, or possibly lease related, to aviation and marine exposures, it seems, if K-Cessions excludes specific war related damage impacts to these lines of business.

We’d assume any exposure to K-Cessions would be relatively minor, given the mix of business it covers, while it could be some time before Hannover Re understands its own full exposure to the conflict in Ukraine and even longer until specific specialty lines losses were understood and identified to qualify under the K-Cessions quota share.

However, this shows that the insurance-linked securities (ILS) market could have some minor exposure to the ongoing Ukraine conflict.