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Hannover Re secures USD 50 million in option capital

Hannover, 15 December 1998:

Hannover Re has once again made use of capital markets for the purpose of laying-off catastrophe risks. Whereas in the majority of transactions in the past investors made their funds directly available, in this case Hannover Re obtained an option to calling additional swap commitments upon the materialization of certain conditions.

The most important prerequisite for calling the additional commitments is the occurrence of a natural catastrophe leading to a market loss in excess of USD 20 billion. A loss of this magnitude could be caused by a hurricane or an earthquake in the United States, for example, or by a typhoon or an earthquake in Japan. In the event of the option conditions occurring, additional swap commitments of USD 50 million can be called from the option underwriters.

The option was placed with North American institutional investors and is an amendment to the K2 transaction effected in November 1996 (cf. NewsLetter dd. 29 November 1996). It was therefore named K2+. By means of this transaction Hannover Re ensures that it will be able to maintain its strong position in the area of natural peril reinsurance - even in the wake of one or several major catastrophes. Given the profitable development of the reinsurance portfolios securitized by K2 it was possible to structure the option costs on a very favourable basis.

In acquiring this option, Hannover Re once again underlines its leading role in the field of securitization, i.e. the transfer of (re)insurance risks into capital markets. In addition to the above mentioned K2 transaction, Hannover Re had already transferred catastrophe risks as early as 1994 with the KOVER transaction. In April 1998 life reassurance acquistion costs were transferred into capital markets for the first time ("L1"; cf. NewsLetter dd. 15 April 1998).