Hannover Re expects to be able to benefit from its robust retrocession arrangements through the rest of the reinsurance renewals in 2023, as this enlarged source of partner capital, topped off by the biggest ever K-Cessions sidecar placement, will help the reinsurer offer more capacity without increasing its own net risk appetite.
This is according to Sven Althoff, Member of the Executive Board for Property & Casualty business at Hannover Re, who speaking during an investor and analyst call this morning, explained how growing the retrocession program has come at exactly the right time for the company.
This is the largest the K-Cessions sidecar has ever been and in the current market environment, when retro capacity has dwindled and many sponsors of sidecars have seen their arrangements shrinking, it’s testament to the long-standing partnership Hannover Re has with investors through the sidecar structure.
The retro program growth is important for a number of reasons, helping Hannover Re manage and moderate exposure to significant loss events, but also helping it to be a more significant trading partner with cedents as well, which presented an opportunity for growth in the hard market at the January reinsurance renewals.
Sven Althoff said this morning that, “The higher retro protections which we were able to place allows us to offer additional capacity to our ceding companies, without increasing our own net risk appetite over and above the small increases we were willing to accept when we started with the renewal season.”
Importantly, Althoff says that the increased capacity the retro program effectively gives Hannover Re, will benefit the firm through future renewals, with hard reinsurance market pricing expected to persist.
“For the April and mid-year renewals in Japan, Australia. And North America, we do expect continued strong momentum of reinsurance pricing, and we will be able to be a flexible partner for our ceding companies due to the fact that we had a successful retro placement,” Althoff explained.
Adding, “So, we will be able to take advantage of the positive trading environment for natural catastrophe business also throughout the year 2023.”
Discussing the specifics of the property retrocession renewal, Althoff noted that the success of the record-sized K-Cessions placement has also helped it in managing the program better as well.
First he explained that, “On the property side, we have been able to renew all of our three main retro vehicles. Let me start with our pro-rata, K-cession, where we were able to place more than $800 million of capacity, this compares to $450 million of capacity which we placed last year.
“Due to the very strong pricing environment, particularly on the natural catastrophe business, our retro partners were willing to support us even stronger compared to the previous year, also, in order to take advantage of the good trading environment on their side.”
“This was very welcome because of the imbalance of supply and demand for natural catastrophe business in general. So, it’s enabled us to be more flexible in our gross underwriting and satisfy the demand from our ceding companies. And so, from that point of view, a very pleasing development,” Althoff continued.
He moved on to speak about the other core elements of Hannover Re’s property retrocession program, which is where the enlarged K-Cessions provided other benefits.
Althoff said that, “On the excess of loss, what we call the whole account, we were able to place roughly €100 million more in capacity, so now at €387 million.
“This was certainly a more challenging renewal, given the loss experience and the tightness on the supply side, also for retro capacity.
“We have seen the same dynamic that we have seen on the incoming business. So, there was an ask for higher retentions, and there was a re-pricing of the business.
“But in combination with K, we were able to move the retention levels of our whole account protection upwards, so that our overall spend for our whole account excess of loss protection is not significantly higher compared to the previous year.”
The much larger K-Cessions placement therefore helped Hannover Re navigate the challenging retrocession renewals more effectively, at a time of reduced capacity and much higher pricing in some parts of the retro market.
Which makes the Hannover Re aggregate retro buy even more important perhaps, as that has been likely the most stressed area of retrocessional reinsurance availability at the recent renewals.
Althoff explained that, on Hannover Re’s aggregate excess-of-loss retro protection, “Here we decided to place slightly less limit, compared to the previous years.
“The reason for that was the already very successful K transaction at the time of placement, and the fact that due to the restructuring of the aggregate protection, we wanted to have less overspend on that vehicle in order to control the overall spending on the retro side for 2023.”
The enlarged K-Cessions quota share sidecar vehicle has provided significant support to Hannover Re through the renewal, both in terms of helping it navigate a challenging retro market, while also taking advantage of underwriting opportunities.
The reinsurer grew its book at the 1/1 2023 renewals, with natural catastrophe premium rising by roughly 30% and further growth anticipated at the renewals later the year.
Althoff said that K-Cessions is one factor in this, helping Hannover Re write more business, while not retaining significantly more risk, so better managing its net risk appetite. It also means the company has more capacity to deploy and can target further growth in the hard reinsurance market.
He said the reinsurer has “dry-powder” on hand for later renewals, commenting, “We will have the flexibility to look at attractive alternatives, or additional business cases, for the 1st of April, 1st of June, 1st of July renewals. and, therefore, we are optimistic that our net premium for the cat business will ultimately increase during the course of 2023.
“But we are under no pressure to write additional cat business, in case the pricing development should slow down, which is not what we expect.
“We expect a very strong momentum on the pricing side also to continue for the rest of the year. So, therefore the dry powder is very welcome.”
Moving on to explain why Hannover Re didn’t deploy more of this capacity at 1/1, Althoff said, “One reason why we have not fully utilised the capacity at the 1/1 renewal is of course also a question of timing.
“I mean, some of the 1st of January business renewed rather early, so therefore we wanted to wait for the final outcome of our retrocessional placement, rather than speculating how successful we may or may not be.
“Therefore, that dry powder was not available all through the general renewal, but only in the later part.”
However, the enlarged retrocession program, more attractive reinsurance pricing and dry-powder available, does not mean Hannover Re will target outsized exposure growth in the United States, Althoff said.
He commented that, “The higher amount of retro has not significantly changed our view on U.S. perils, we are still working hard to improve the diversification in our portfolio.
“So, while we are willing to grow the U.S. side, in proportion with the rest of the portfolio, we are still not prepared to outgrow on the U.S. natural perils side compared to other territories.”
Finally, Hannover Re has increased its catastrophe budget for 2023, given the strong growth it’s been seeing, but also due to inflation and currency effects.
Growing the retro program in tandem with this allows the reinsurer to do more for its clients, while remaining risk managed, in terms of net risk appetite.
Althoff said that, “We felt in order to create room to manoeuvre and in order to also help our ceding companies with additional demands, it was the right moment in time to expand our retro placement and have the corresponding increase in the major loss budget.
Also read: Hannover Re grows retrocession protections by 56% at January renewals.
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