For German reinsurer Hannover Re, the K-Cessions quota share retro reinsurance sidecar facility is “the backbone of our retrocession program” according to Henning Ludolphs, the reinsurers Managing Director for Retrocessions & Capital Markets.
Hannover Re has increased the size of the K-Cessions capital markets and third-party capital backed retrocession facility for 2015, adding approximately 25% to its capacity, taking it from $320m to $400m for the calendar year.
“Our K-Cessions quota share is the backbone of our retrocession program and goes back to the first ever transfer of catastrophe risks to capital markets, the KOVER–transaction in 1994 (USD $85m),” Ludolphs told Artemis.
The K-Cessions retro quota share facility has evolved over the years, acting as a sidecar facility that allows Hannover Re to share a portion of its book with capital markets investors, while also providing a flexible source of retrocessional protection.
It’s part of Hannover Re’s growing use of the capital markets, as it grows its role in facilitating, fronting and transforming collateralized reinsurance and insurance-linked securities deals as well.
Ludolphs explained the 2015 transaction to Artemis, saying that K-Cessions, which is the name for the 2015 facility, is a “fully collateralized capped quota share” that allows third-party investors to participate in reinsurance business underwritten by Hannover Re.
As a result, the K-Cessions transaction follows Hannover Re’s underwriting guidelines and as it is just a share of its book, provides a full alignment of interest.
K-Cessions is not itself a separate reinsurance sidecar vehicle, however it functions in the same way, Ludolphs said. It’s not the only retrocession that Hannover Re arranges either, having both whole-account and aggregate retro covers in place as well.
For 2015 K-Cessions includes a diverse portfolio of risks underwritten by Hannover Re, including a well diversified portfolio of non-proportional catastrophe reinsurance treaties from a defined set of territories, and aviation, marine and energy business.
That makes K-Cessions a very attractive transaction to participate in for the insurance-linked securities (ILS) investment market, with broadly diversified returns possible from K-Cessions. Ludolphs said that it is not just ILS investors and while the majority are from the capital markets there are a few traditional reinsurers on board as well.
Ludolphs continued; “We are pleased to have wide ranging support from the ILS sector, with many ILS investors being long-term partners.”
As one of the longest running reinsurance capital markets transactions, Hannover Re’s ‘K’ series of retrocession quota shares have become a staple for many ILS and capital market investors in insurance risks.
As Hannover Re increasingly looks to how it can leverage third-party and lower-cost capital directly from capital market investors, the K-Cessions, and whatever they may be named in future, will likely be a fixture in the market for many years to come.
As K-Cessions functions in the same way as a reinsurance sidecar, we have added it to our directory of collateralized reinsurance sidecar vehicles.