Overview on ILS; NatCat exposure. Juergen Graeber, Member of the Executive Board/COO non-life

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1 Juergen Graeber, Member of the Executive Board/COO non-life 16th International Investors' Day Frankfurt, 23 October 2013

2 ILS: More than simply catastrophe bonds Transfer of risks to capital markets Insurance Linked Securities (ILS) non-life market Catastrophe bonds (incl. extreme mortality/health) Collateralised reinsurance (~ USD bn.) Current outstandings ~ USD 18 bn. (mid-2013) Total transfer of non-life risks ~ USD 45 bn. Industry Loss Warranties (~ USD 3-5 bn.) 1

3 Catastrophe bonds Hannover Re initiated catastrophe bond market in 1994 Functioning Transfer of catastrophe risks to capital markets via (tradable) securities Usual quantities: USD 100 m m. per issuance Originator s perspective Sufficient capacity available (if price is right) Very low counterparty credit risk Diversification of reinsurance capacity Investor s perspective Access to reinsurance market Diversification More complex and more expensive but the latter has been changing recently Basis risk for non-indemnity trigger Only one limit available over the term of the bond Still relatively small market Higher cost of capital compared to traditional reinsurers 2

4 Strong impact from the financial crisis......however, the market is recovering New issuance volume per year (catastrophe bonds) 10 in bn. USD Significant volume of new money enters the ILS market First transfer of NatCat exposure to capital markets by Hannover Re Until 2005: Boutique market, only small group of investors Many investors leave the market * * As at 31 July

5 Catastrophe bond pricing has become very competitive US perils Discount Margin (in bps) Current Expected Loss (in %) Source: Aon Benfield Indicative Pricing as at 31 July

6 Catastrophe bonds: a good performance with a low volatility Performance of different market segments Relative performance 300% 250% 200% 150% 100% 50% 0% MSCI World Index Swiss Re Catbond Index Barclays BB Corporate Bond Index 5

7 US hurricane dominates catastrophe bond market Catastrophe bond issuance in m. USD Others Japan Life 6, , US earthquake 1, EU wind Multi 1,535 1,390 US multi US hurricane 1,575 1, Jan - Jul

8 We take advantage at all levels Hannover Re and catastrophe bonds Risk management Buy protection from the ILS market Eurus III: EUR 100 m. European windstorm, index-based Extreme mortality: Privately placed pandemic protection K facility: collateralised quota share placement Fee income Service to third parties to transfer their risks to capital markets ( transformer function ) Globe Re: USD 133 m. portfolio of US risks, indemnity basis Kibou Ltd.: USD 300 m. Japanese earthquake, parametric basis Investment returns Invest into ILS ( Investment function ) 5-year track record Investment platform Leine Investment in Luxembourg Hannover Re acts as anchor investor with up to USD 150 m. Ability to take on board third party investment mandates 7

9 Collateralised R/I - the new class of "Bermudian" reinsurers? Behind the scenes - but strong increase Functioning Traditional reinsurance protection where the investor provides full or partial collateral (often a so-called transformer company is involved to facilitate the transfer) Usual quantities: ~ USD 2 m. - 5 m., but could go up to USD 100 m. in some cases Originator s perspective Investor s perspective Same as traditional reinsurance Additional capacity Investor provides collateral Another route to insurance-based risks Covers wider non-life reinsurance spectrum Trust account or LOC negotiations Long-term availability of capacity from investor community? Not tradable Higher cost of capital compared to traditional reinsurers Suitable only for short-tail risks and generally risks that can be modelled 8

10 Tremendous growth But only very rough estimates possible Investors funds in collateralised reinsurance market in bn. USD

11 Our strongest ILS business segment - and still growing Hannover Re and collateralised reinsurance Benefits: Access to traditional R/I risks with simplified process no need to provide collateral to the cedents and leverage components may be provided Benefits: Additional capacity is created with strong Hannover Re security Cedents Premium Claim payment Trust account ( safe assets) Benefits: Generate risk remote fee income Establishes & funds Premium less margin Reinsurance contract Investor Manages & provides funds Reinsurance SPV Transfer of several hundred reinsurance contracts to capital markets 10

12 Opportunities Conclusion: ILS, friend or foe? Hannover Re's perspective Buy protection from the ILS market Offer service to third parties to transfer their life and non-life risks to capital markets ( transformer function ) Generate risk remote fee income Invest into ILS ( investment Function ) Pressure on traditional R/I pricing due to significant inflow of new funds Threats Replacement of traditional R/I capacity? Additional ILS capacity combined with lack of major (NatCat) losses has some impact on traditional R/I pricing (although much less impact on R/I market than on Cat bond market) ILS: a modern way of funds coming to the reinsurance market replacing the waves of new company set-ups in the past Opportunities strongly prevail - if you know how to take advantage 11

13 NatCat pricing comparison Numbers refer to one insurance company Traditional reinsurance Capital market Expected loss in % Multiple Expected loss in % Multiple Numbers refer to one insurance company 2011 higher layer in the capital market and modeled with a different vendor 2012 impacted by model change Investment opportunities are sought after due to abundant capital 12

14 NatCat risk appetite Hannover Re Group In accordance with our internal capital model, the executive board decided to allocate 18% of the company s economic capital to NatCat business 2013 risk budget NatCat (Global Risk Tolerance) amounts to ~ EUR 1.4 bn. reflecting the net underwriting loss the group is willing to take for a 0.5% probability (1/200 years) Based on the 1 January 2013 in-force book, the modeled 1/200 years net underwriting result amounts to ca. EUR 950 m. (i.e. 68% of the risk budget) The GRT as well as all Local Risk Tolerances are significantly below the thresholds as of 1 January

15 We use global and local risk measures to steer our NatCat U/W Utilisation of risk tolerances as of January 2013 Risk tolerances in % Global Risk annual aggregate net Local Risks Net Underwriting Result (NUWR) (negative) for selected Realistic Disaster Scenarios (RDS), single event net 200y annual Net Underwriting Result (NUWR) US Los Angeles earthquake US San Francisco earthquake US New Madrid earthquake US hurricane Miami US hurricane Gulf of Mexico US hurricane NE US hurricane Tampa EU storm Tokyo earthquake Japan typhoon Sydney earthquake Perth earthquake UK floods Central Europe floods Modelled NUWR 80% threshold (capacity for non-euro denominated scenarios) 90% threshold (capacity for euro denominated scenarios) GRT 100% threshold 14

16 18% of the non-life premium is Cat exposed Non-life reinsurance premium U/Y 2012 in m. EUR Total NatCat-exposed premium: 18% 100% % Thereof: 10% 10% 82% US Cat XL 2%p Florida wind: 0.2%p were due for 1.7. renewal Total inforce premium US NatCat exposed Rest NatCat exposed Non-NatCat exposed 15

17 Effects of our various protections Gross to net calculation as at January 2013 (including all lines of business) 250-year loss US hurricane Gulf of Mexico (insured loss of EUR 171 bn.) in m. EUR , , Whole account ILW K Cession AGG XL LL AGG XL Gross loss Relief K Cession/ swaps Loss after K Cession Relief Cat protections Net loss Premium Out Premium In Net loss after premium Tax refund Net loss after tax Effect of net loss might be further reduced by the net cat loss budget 16

18 NatCat losses' influence on EBIT significantly reduced Group operating profit (EBIT) vs. single net losses in m. EUR 1,406 1,098 1,100 KRW WTC EQ NZ, EQ JP, flood Thailand Sandy EBIT Expected EBIT Net loss 17

19 NatCat premium equals 18% of total non-life premium Conclusion We have a well managed and diversified portfolio We have a clearly defined risk appetite We adhere strictly to our threshold system as well as to our margin requirements 18