Hannover Re Securitizes App. $1.32 of Reinsurance Recoverables

Germany’s Hannover Re announced that “for the first time” it has “transferred the risks deriving from so-called ‘reinsurance recoverables’ to the capital markets,” following its “successful securitisations in property/casualty and life/health reinsurance business.”

Reinsurance recoverables – outstanding claims held by reinsurers against their retrocessionaires – “traditionally constitute a substantial item on Hannover Re’s balance sheet,” said the bulletin – “both in relation to its competitors and the company’s shareholders’ equity.

“These recoverables are of a high credit quality and their level per company has always been strictly limited. Nevertheless they adversely affect the assessment of the Group’s solvency by rating agencies, primary insurers and brokers. Therefore monitoring these balances forms an integral part of internal risk management.”

Hannover Re said the securitization would substantially reduce the default risk associated with reinsurance recoverables. “We assume that the rating agencies of relevance to our industry, will consider this transaction — in quantitative and qualitative respects — positively,” CEO Wilhelm Zeller noted. “With this transaction Hannover Re has effectively immunized itself against a potential credit risk.”

The announcement said the “underlying portfolio has a nominal value of €1 billion [$1.32 billion]; it is comprised of exposures to insurers and reinsurers that are classified according to risk classes. The securities issued as collateral through a special purpose entity are split — in accordance with Standard & Poor’s rating categories — into four tranches “AAA ” “AA,” “A” and “BBB.”

“A payment to Hannover Re — after allowance for its deductible — is triggered by the insolvency of a retrocessionaire.”