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Third securitization of life and health reinsurance business

Hannover, 22 November 1999:

Hannover Re has completed a third transaction for the transfer of acquisition costs in life and health reinsurance to the capital markets. Designated "L3", the facility has been concluded for a period of three years and comprises a financing volume of EUR 50 million. It encompasses all classes of life, health and personal accident reinsurance and is specially designed to meet the needs of insurance companies in the Asian emerging markets. Taken together with previous similar transactions, investments of this type totalling EUR 230 million have already been refinanced via the capital markets.

Following Hannover Re's pioneering securitization of natural catastrophe risks as long ago as February 1994, the company was again in the spotlight in 1998 with the first-ever transfer of acquisition costs from life reinsurance business to the capital market (a facility referred to as "L1"). This transaction was awarded "Innovation of the Year" in 1998 by the renowned UK trade journal "The Review" (cf. NewsLetter dated 23 September, 1998).

In 1999 Hannover Re concluded a further financing transaction ("L2") with a volume of EUR 130 million. In contrast to its "L1" predecessor, this facility was geared to so-called block assumption transactions (cf. NewsLetter dated 16 April, 1998). In this case, the reinsurer does not only finance the acquisition costs from new business, but assumes existing (generally closed) portfolios against payment of a single commission. A further difference between "L2" and "L1" was that "L2" may also include personal accident and health insurance business rather than only life reinsurance.

Owing to the fact that under German accounting rules acquisition costs from life and health reinsurance business have to be written off immediately in the year in which they are incurred, they impose a heavy burden on the profit and loss account of rapidly growing life (re)insurers. By transferring such costs to the capital markets, Hannover Re is able to ensure the necessary capacity to continue to expand its strategic priority segment of life and health reinsurance at the accustomed high growth rates. Within the Hannover Re Group as a whole, the life and health reinsurance segment has recorded forty-fold growth in the 1990s with an increase in excess of 50% in the current financial year alone to reach a total volume of EUR 2.1 billion.

The following table summarizes all Hannover Re Life/Health capital market transactions to date:

Transaction

Placement

Volume

Area of Application

L1

Rabobank

EUR
50 mill.

New life business
Western Europe

L2

Rabobank/
HeLaBa

EUR
130 mill.

New and a-force business
Life, health, personal accident
Europe and North America

L3

Citibank

EUR
50 mill.

New and in-force business
Life, health, personal accident
Asian emerging markets

Currently a further facility ("L4") is in the works. This transaction will be geared to unit-linked life insurances from German-speaking markets.

The company also continues to be active in the securitization of natural catastrophe risks: the initial transaction ("Kover") in 1994 comprising a volume of USD 85 million was followed at the end of 1996 by "K2", a portfolio-linked swap of USD 100 million (cf. NewsLetter dated 29 November, 1996), and as an extension of "K2" at the end of 1998 by an option on a further USD 50 million ("K2+"). Negotiations are currently taking place with the investors with a view to renewing the "Kover" facility which is due to expire at the end of this year.

Hannover Re not only draws upon the capital markets as a source of underwriting capacity, but also participates actively in the securitization sector as an investor. A budget of USD 100 million was set aside, and this has already been intensively utilized with an amount of some USD 75 million deriving from participation in eight transactions.