Hannover Re collateralised reinsurance & cat bond business expanded in 2023

Despite the slowdown in the collateralised reinsurance marketplace in recent years, global reinsurer Hannover Re continues to place more limit on behalf of investor and ILS fund partners, growing this segment of its business again in full-year 2023.

Hannover Re is a key facilitator for the global insurance-linked securities (ILS) market, both through assisting cedents with catastrophe bond transactions, by fronting the capital markets, as well as utilising its balance-sheet to help other fund managers and investors access reinsurance risk in collateralised form.

Hannover Re’s role in insurance-linked securities (ILS) market facilitation has expanded further, through its fronting and risk transformation activities for collateralised reinsurance and catastrophe bond transactions.

The reinsurer partners with dedicated ILS fund managers and investors, helping them access risk through Hannover Re’s structures and using the added benefit of its balance-sheet to absorb some of the tail risk associated with deals.

Hannover Re derives benefits from these fronting and risk transformation relationships through incremental earnings, in terms of fees, and just as importantly it enables the reinsurer to become a larger and more important partner to clients and cedents, enabling them to directly access capital market reinsurance capacity, alongside the robust balance-sheet protection it provides.

In 2022, Hannover Re reported a key metric for the collateralised reinsurance fronting and risk transformation activities grew significantly, with ceded exposure limit of the underlying retrocession arrangements rising 36% to almost EUR 6.2 billion for the year.

Then, in the first-half of 2023 another measure of these ILS-related activities rose as well, as the reinsurer reported that the collateral furnished to ceding companies by investors, as security for potential reinsurance obligations from ILS transactions it facilitated, rose 38% on the prior year to more than EUR 4.6 billion for the first-half.

Now, some full-year data has come to light and in full-year 2023 there was additional expansion.

Hannover Re reports that ceded exposure limit of the underlying retrocession agreements for collateralised reinsurance deals it facilitated reached EUR 6.278 billion, up slightly on the prior years EUR 6.183 billion.

While only a slight increase, we suspect this figure includes exposure limits related to collateralised reinsurance deals from previous years that remain in Hannover Re’s reporting, so increasing in a year with few major catastrophe events that hit the ILS market suggests more robust business growth than the numbers alone portray, we believe.

This is evidenced by significant full-year growth in collateral furnished by ILS investors to support the collateralised reinsurance transactions Hannover Re facilitated.

In total, EUR 5.112 billion of collateral which was furnished by investors as security for potential reinsurance obligations from ILS transactions across full-year 2023, much higher than the EUR 3.323 billion from 2022.

That shows that, despite all the reports of collateralized reinsurance activity slowing, the market has maintained a strong position in the market and Hannover Re has won a larger portion of that ILS business in 2023, it appears.

In the catastrophe bond fronting segment, Hannover Re had a record year in 2023, with some US $2.8 billion in cat bond deals placed that it had a hand in facilitating for clients.

That beat the record of US $2.7 billion set in 2021 for the reinsurer.

Hannover Re expects activity will continue to grow in ILS markets, not least because of a continuing, although not as severe, catastrophe reinsurance capacity shortage around the world.

Rising demand for insurance-linked securities (ILS) is forecast by the reinsurer and Hannover Re expects its ILS related business will grow further and deliver a consistent profit contribution for the company.