Hannover Re reveals how structured deals will drive its 2017 growth

Despite the soft market, Hannover Re has increased its growth targets for 2017 on the back of what it has described as a healthy pipeline of structured deals. Following a strategy its larger competitor Swiss Re  promoted in 2016, Hannover Re is now also focusing on this segment.

In the January 2017 renewals, Hannover Re increased its structured reinsurance premiums by €710 million to €1.78 billion, driven by North America, Europe and Latin America.

As a result of this growth, the company  raised its premium target for 2017 and now expects an increase in the low single-digit percentage range. In contrast, in the January 2017 renewals, premiums in Hannover Re’s property/casualty (P&C) reinsurance shrank 1.4 percent compared with the previous year.

“Our financial solutions business is going well and we still have a very good pipeline of treaties,” CEO Ulrich Wallin said on a Feb. 2 analyst conference call. “For the future development we are quite optimistic for that business,” he added.

The German reinsurer has also raised its 2017 guidance for group net income to more than €1 billion from more than €950 million. The profit guidance was changed mainly due to successful conclusions of a number of financial solutions transactions in life & health.

Structured reinsurance deals are tailor-made solutions to assist primary insurance clients to increase the efficiency of their capital management, optimise their balance sheet and manage their earnings volatility.

Hannover Re sees an increasing demand from primary insurers for capital relief transactions, driven by Solvency II in Europe and by rating agencies' capital assessment in the US and in Latin America.

Structured transactions are not a new field for Hannover Re and it has been active in this field since the early 1990s, Jürgen Gräber, member of the executive board for coordination of worldwide P&C reinsurance, stressed during the call. There have been waves of supply and demand of these products, and the last peak was in the mid-90s when many structured reinsurance treaties were purchased to discount loss reserves, he explained.

After uncertainties arose around the appropriate accounting of structured reinsurance treaties demand declined. But things have changed again since. “We are now back to full swing for demand,” he noted.

The demand is driven by the removal of uncertainty about accounting and also by the fact that capital regimes worldwide are increasingly risk-based, Gräber noted.

As such structured deals are usually quite complex, large reinsurers like Swiss Re or Munich Re are believed to have a competitive advantage compared to smaller reinsurers.

Hannover Re has fuelled demand for structured deals through a marketing campaign promoting Hannover Re’s capabilities in the field, which is now bearing fruit, Gräber said. In addition, internal operational changes have enabled growth. Hannover Re moved the responsibility for the North American business from its Irish subsidiary to the German team which works closer with the North American treaty department, Gräber explained.

Structured transactions are deemed as fairly profitable, offering an opportunity for reinsurers to boost income in an otherwise challenging operating environment, characterized by low interest rates pressuring investment returns, and a soft market squeezing underwriting profitability.

The attractiveness of the business may not be visible at first glance, as the EBIT (Earnings before interest and taxes) delivered by structured transactions is lower than traditional reinsurance because they are also less volatile, Gräber noted. But when assessed from a return on allocated capital, the deals are fairly attractive, he explained.

However, the overall growth of structured transactions may not be sustainable. When asked during the call if these deals are sticky, Wallin suggested that this is not necessarily the case.

He pointed to cases when contracts were purchased only for one year as afterwards the client raised capital and increased its capacity for net retentions.

In China a new regulatory regime caused a change in the capital allocation to certain lines of business which reduced demand for structured transactions, he added. But the business can be sticky if the purchase is driven by the chief financial officer. For them the price of capital is an important consideration, and reinsurance compares favourably in this regard to other sources, Wallin explained. When a CFO therefore purchases a surplus relief contract it usually becomes part of the company’s capital management on a multi-year basis.

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