At the January renewals, global reinsurance firm Hannover Re capitalised on its long-standing relationships with investors to grow its K-Cession quota share sidecar structure to a record size, ultimately helping the company do more to support its ceding clients demand for natural catastrophe capacity.
This is according to Member of the Executive Board Silke Sehm, who has responsibility for catastrophe XL, structured reinsurance, insurance-linked securities (ILS) and retrocession at Hannover Re, as well as Henning Ludolphs, Managing Director for Retrocession & Capital Markets at the reinsurer.
Artemis spoke with Sehm and Ludolphs after their record K-Cession quota share placement into the capital markets.
Hannover Re expanded its capital markets backed K-Cession quota share sidecar by nearly 85% to $831 million at the January 2023 renewals, securing a significant increase in retro capacity from the structure and Sehm and Ludolphs explained why this is an important success for Hannover Re.
Sehm began by telling Artemis that 2023 represents “The hardest market I’ve seen so far, in my 30 years’ experience,” before telling us why K-Cession and its growth is important for the company.
“For us, it was important that we are relevant to our insurance partners and can offer nat cat capacity and this was possible because of our long-term relationships with partners on our K-Cession quota share, which we established in 1994,” Sehm explained.
Adding that, “The idea is, over the cycle, a long-term relationship partner for our nat cat book, including marine and aviation. During that cycle, we have investors who said they wanted to engage more with us, especially because we see such a hard market and attractive returns right now, meaning they want to allocate more capital.”
“This is down to that long-term relationship which we have with all our retrocessionaires.”
“Therefore, we placed $831 million, compared to $450 million in the previous year, so that we can write more nat cat business and be relevant for the industry.”
Ludolphs agreed and continued to explain, “We have a long-term history of this, the K-Cession quota share goes back to 1994, but also the other retro concepts we have are in place for a number of years.”
“So, the combination of the long-standing K-Cession quota share, our whole account cat cover and the aggregate cover, this gives a bit of stability and makes it easier for investors who have an interest to jump on and support us.”
Ludolphs also explained that there were some new investors to the retrocession program in 2023, a positive step for the future as the structure’s investor-base has expanded.
“The large volume came from existing supporters,” he said. “But we have a few new ones as well.”
Sehm said that the use of K-Cession is an important strategy for Hannover Re, as it allows the reinsurer to write more nat cat business and ultimately be more helpful to its clients.
“I think our role as reinsurers is to offer our own capital to the primary insurance market, but at the same time, try to bridge the gap between the capital market and the insurance industry. We want to help capital market investors allocate their capital to these risks and makes that sort of risk transfer more relevant for the insurance industry,” she explained.
Adding, “Everyone is talking about closing the protection gap, climate change, higher inflation, higher rates, that the models have to be reflected correctly and that pricing is essential. But then I also think it’s our responsibility to offer sufficient capacity to our clients on the nat cat side, so this is where the K-Cession quota share is a natural fit.”
Sehm continued, “We can write more nat cat business now. With a bigger K-Cession quota share, we can offer more coverage to the primary insurance side and be more relevant, so to speak. It’s not that we really need it, for our own balance sheet.”
Ludolphs said that with the K-Cession capital raise having almost doubled over the prior year, Hannover Re now has additional capacity it can make available at the upcoming renewals this year and expects to increase its nat cat appetite accordingly.
Speaking about the K-Cession’s pool of capital, Ludolphs said, “We didn’t need this all for the Jan. 1 renewal, but there was a plan to have sufficient dry powder for the upcoming renewals during the year.”
“So, we’re optimistic for the 1/4, for the 1/6 and the 1/7 renewals. It’s good to know that we can act, and not only react, because we won’t be too tight on capital.”
In addition, growing the K-Cession quota share has helped Hannover Re to navigate the challenges presented by a retrocession market that has been lacking capacity and seen some players exit the space.
It also meant the reinsurance firm could manage its retro expenses better and optimise its purchases for 2023.
“With this huge support on the K-Cession quota share, we had a bit more flexibility on our other retro programmes,” Ludolphs said. “So, we’re not really pushed to take-up all of what we could have taken, which helped us to control and steer the spend on the others.”
He continued, “Usually, the K-Cession quota share is agreed during the beginning/mid of December while our other retro tools are usually finalized at the end of December.
“Knowing that we had good support with the K-Cession quota share gave us a little bit of flexibility when it came to the others.”
Finally, Sehm told us that the strategy, to make use of capital markets investor relationships to enable Hannover Re to be even more useful to its customers, is part of how the reinsurer manages market cycles.
“In the past, the industry was always talking more about cycle management, although it still exists, we have such a hard market, such high rate increases and in a hard market, you should increase your shares on top on that,” Sehm explained.
Concluding that, “This is really what cycle management means and this is valid for Hannover Re as a reinsurer. But this is also valid for our retrocession partners. So, if they have capital to allocate now, this is the perfect timing.”
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