Last week German-based property/casualty reinsurer, Hannover Re, completed its $230 million program, dubbed K3, a structured financing of portfolio-linked securitizations of reinsurance risks for natural disasters throughout Europe, Japan and the U.S.
Since the Sept. 11 attacks, the rise in overall reinsurance rates were largely expected to drive a trend for increased appetite in catastrophe bonds, which are bonds designed for primary insurers and reinsurers as an alternative tool for covering their pay-out risks that extend past conventional reinsurance covers.
According to a report in the International Securitisation Report, at the beginning of this year sources expected 10 more cat bonds to come to market by year-end that would potentially drive volumes to the $2 billion mark, up from the $1 billion recorded last year. However, signs of such a pick-up had been slow in coming and by the beginning of March there were no signs that issuers were planning to come to market.
This latest deal reinforces the expected trend of a pick-up in issuance. According to a statement issued by Hannover, the transaction provides the company with an equity substitute of $230 million and enhances its capital position by more than EURO800 million.
The company additionally raised hybrid capital by issuing a subordinated bond totalling EURO350 million last year. "With these measures we have created a solid foundation for exploiting the opportunities presented by the current strong upswing of property/casualty reinsurance market to the maximum extent," said a spokesman for the company.
The transaction will facilitate the company to adapt its capital position to the cycles of property/casualty reinsurance without creating excessive capital going forward, in the event there is a softening in the current hard market price level, said sources.
The reinsurance risk securitized in this recent K3 deal will be distributed among U.S. and Japanese investors who share the reinsurer's risk up to the maximum of their invested capital, in the event of loss from the securitized risks.