Hannover Re may shrink proportional retro (K-Cession) a little for 2024: Althoff

Having significantly increased the amount of risk it cedes to retrocession partners at the start of this year, Hannover Re is now looking at the flexibility it has in the retro program and may opt to cede less to proportional retrocession partners next year, one of its Board Members said today.

Sven Althoff, Member of the Executive Board for Property & Casualty business at Hannover Re, said during an analyst call this morning that the retro program was increased to the benefit of its partners for 2023.

As we reported at the time, Hannover Re grew its retrocession protections by roughly 56% at the start of 2023, including an expansion of its capital markets backed K-Cessions quota share sidecar facility of almost 85% to $831 million, the biggest it’s ever been.

The expansion of the retro program and the proportional K-Cessions sidecar in particular, was seen as a way for Hannover Re to offer more capacity without increasing its own net risk appetite.

But, in a year such as we’ve seen through the first three quarters, it appears Hannover Re has been sharing more of its result with retro partners, while benefiting from fewer recoveries under the retro arrangements, as we explained earlier this morning.

Which led Althoff to say during the analyst call, “On the retrocession side, you’re absolutely right. We have a long term partnership approach with our retrocessional partners and some of them were in a deficit to position after the last number of years.

“With the improvement in the original reinsurance market, we have decided to cede more particularly on our K facility.

“The flipside of the low recoveries we’ve been reporting about during the first nine months, of course, is the positive effect, that the payback to our retrocessional partners is coming in quicker than we originally anticipated.”

Because of this, Hannover Re now feels it has more flexibility to look at its retrocession arrangements again and further optimise them, it seems.

Althoff said this is “giving us the necessary flexibility to look at the amount of retro we are purchasing”, because of its risk appetite and budgeting.

“We have not made any conclusion on that side yet, we are in discussion with our partners,” Althoff said.

Continuing to add, “But directionally I would say that, on the excess-of-loss side, our coverage should be very similar to what we are purchasing today and on the proportional side, we most likely cede a little less compared to what we have ceded in ’23.”

The proportional side is the K-Cession securitisation, the sidecar facility. So Althoff’s comments suggest Hannover Re could shrink the K-Cessions structure slightly for 2024, having found it is sharing more of its reinsurance result than it perhaps envisaged would be the case through the proportional quota share structure this year.

Of course, it is still relatively early and Hannover Re won’t finalise its K-Cession for 2024 for a few weeks yet and while it may reduce the size slightly, we suspect it will still remain the most significant component of the reinsurers’ retrocession.