More upside on average in retaining more risk as K-Cessions shrinks: Althoff, Hannover Re

Earlier this year we reported that global reinsurance company Hannover Re was assessing its risk management need in relation to its K-Cessions quota share sidecar for the second year running, with a potential reduction to be expected and this morning executives from the company confirmed this again.

The executives highlighted the expected reduction in the the K quota share sidecar arrangement, further explaining what this might mean for Hannover Re, in terms of volatility and increased large losses and concluding that, in an average year there is more upside to retaining more risk while market conditions are so attractive.

Hannover Re sees the profitability of underwritten business as particularly high right now, leading it to want to cede less of it out to investors and quota share partners, it seems.

On the outlook for the renewal book, Sven Althoff, Member of the Executive Board for Property & Casualty at Hannover Re, said, “We are expecting broadly unchanged trading conditions across our entire portfolio. So therefore, like in previous years, we expect basically all regions, all products lines, will participate in growth opportunities.

“One area which we can highlight is on the property catastrophe side, as mentioned during our investors day, we see good opportunities on the incoming business, but we will also buy somewhat less on the retrocessional side, particularly our K transaction.”

Later in the call, CFO and future CEO Clemens Jungsthöfel explained how the projected increase in large losses is at least in part driven by the expected shrinking of the K-Cession sidecar structure for 2025, as well as the continued growth of the reinsurance company.

“The 7 percentage points that we are guiding on top-line, on a net basis, will actually be a bit higher, due to the fact that we plan to decrease the level of particularly the K quota share,” the CFO said.

Althoff was also asked about how the reduced retrocession might affect Hannover Re through 2025 and he highlighted how much of the large loss increase might be expected to be due to the reduced size of the quota share cession.

“On K, even though I don’t have the exact number, it should be a mid double digit contribution to the increase in the major loss budget, but I don’t have the exact figure for you,” Althoff said.

He went on to highlight, “You have to expect a little more volatility, not significantly. I mean, as I said, we do expect the combination of more business on the inward side, plus less on the outwards, which of course is creating a little more volatility.

“On the other hand, we expect the reduction in retro buying to come from the K transaction, which by its very nature is a proportional retrocession.”

Althoff further explained what this means and that it is focused on peak perils, given the natural catastrophe risks that are included in the risks ceded via the K-Cessions sidecar-like structure.

“Therefore proportional cession is only changing the underlying volatility profile of the business, to some extent. The biggest way of how this change is materialising is by us selecting the parts of the portfolio that are covered in K, so particularly the peak perils cut,” Althoff said.

Continuing to explain that, “This change will not be felt outside our exposure bases in North America, Europe, Japan and Australia, and Chile I should add, because all other parts are not covered by K.

“So, it’s not a global increase of volatility profile, but some increase in volatility profile in peak perils, given the attractive pricing environment.

“It’s of course our assumption, that the upside, in an average year, should give us a benefit compared to the volatility downside.”