Hannover Re benefited from an increased recovery under its long-standing capital markets backed mortality swap arrangement by the end of the first-half of 2022, with the financial benefit from the retro hedge reaching EUR 88 million by the end of the period.
Hannover Re has placed tranches of mortality swaps into the capital markets for nearly a decade, with the strategy paying off in recent quarters as the reinsurers’ COVID-19 pandemic losses drove its mortality rate higher and triggered recoveries under this swap arrangements.
Hannover Re first reported a benefit from the capital markets investor backed extreme mortality cover after 2021, when it booked positive income of EUR 43.9 million, recognised under assets measured at fair value through profit or loss in the investments on the life and health reinsurance side of its business.
Then, after the first-quarter of 2022, Hannover Re disclosed further recoveries under the capital market investor backed extreme mortality swap, as the underlying mortality index rose further (from 112% to 114%) driving another EUR 46 million of benefits that were reported under its life and health investment income for Q1 2022.
The benefits from the mortality swap have continued to flow, with further recoveries under the capital markets retro style hedge in the second-quarter of 2022, it seems.
The company explained that COVID losses continue to impact its life and health reinsurance business, “The pandemic led to further expenditures, especially under mortality covers. As anticipated, however, these were altogether lower thanks to the milder variants of the virus. Altogether, Hannover Re incurred pandemic-related losses of EUR 194 million (EUR 263 million) in the first six months. Of this total amount, EUR 72 million was attributable to the second quarter.”
However, the mortality hedge has continued to deliver benefits, helping Hannover Re reduce its exposure to the elevated level of deaths from the pandemic.
“Hannover Re posted positive income of EUR 88 million from its extreme mortality cover, layers of which Hannover Re has placed on the capital market on a regular basis since 2013. This was booked under the investments recognised at fair value associated with life and health reinsurance,” the reinsurer explained.
So once again, Hannover Re’s strong retro program was also evident in its life and health business through the first-half, with the company posting this positive income of EUR 88 million related to a retro recovery against its extreme mortality cover, layers of which have been placed on the capital market on a regular basis since 2013.
It’s possible that some of the ILS funds that allocate to life reinsurance related risks may have been on the hook for a share of this, as we understand this long-standing capital markets mortality hedge is quite widely backed in the market.
Commenting on the benefits of this extreme mortality hedge, Hannover Re CEO Jean-Jacques Henchoz said, “As far as the costs of the excess mortality connected with the Covid-19 pandemic are concerned, we are helped by an extreme mortality cover that we had similarly taken out years ago as partial protection against such events.
“This prudent approach to risk management that we have put in place for ourselves is something that we also offer our customers.”
Hannover Re’s mortality swap cover is a hedge against an extreme increase in mortality rates, so covers such an event linked to pandemics, natural catastrophes or an event like a terrorist attack.
This mortality risk swap is indexed against a weighted combination of US, UK and Australian population mortality, with proportional payouts triggered once the mortality index reaches 110%, up to 120% where the protection exhausts.
The mortality index had reached 114% at the end of Q1 2022, so must stand higher now, likely around 116% we would estimate, meaning there is additional benefits to be had from the extreme mortality retro cover, should COVID claims rise again for Hannover Re over the rest of the year.
At the end of the first-half of 2022, the derivative underlying this mortality swap was booked by Hannover Re with a positive fair value of EUR 127.6 million, with income of EUR 88.4 million booked in the course of the 2022 financial year so far.
Hannover Re’s use of the capital markets for extreme mortality protection has paid off during the pandemic and is a great example of capital markets backed risk transfer playing an important retrocession role for a major global reinsurance company.