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Hannover Re K2 - Insurance Linked Swap


Hannover Re writes property catastrophe excess of loss and aviation excess of loss business on a global basis, which it manages in a portfolio known as K2. K2 covers are written in several geographic and product sub-portfolios including U.S. earthquake, U.S. windstorm, Aviation XL, Canadian natural perils (wind and earthquake), Australian natural peril (wind and earthquake), Japan earthquake, Northern European wind, and Northern European non-wind perils (earthquake, flood, landslide, and avalanche). Hannover Re manages its business on an economic-capital-at-risk basis, which provides for capital to be allocated to individual lines of business according to strict risk/reward criteria. Based on its capital management criteria, Hannover sought to limit its exposure to K2 for essentially a 5-year period by entering into an innovative risk-financing solution.

Client Need

Hannover Re retained RISConsulting to act as its exclusive advisor for the development and structuring of a first-ever reinsurance swap transaction that would allow it to reduce its internal capital allocation for K2 and to assist its execution agents in placing the risk.

The Solution

An innovative reinsurance-linked swap transaction between Hannover Re and Citibank, whereby Hannover Re agreed to pay Citibank K2 portfolio-indexed profits in exchange for receiving from Citibank K2 portfolio-indexed losses. The swap structure allowed Hannover Re to raise $100 million of risk capacity and surplus relief for 5 calendar years of risk underwriting. Citibank in turn entered into matching swaps with outside investors (the Swap Counterparties), where the investors' returns are tied to the K2 portfolio reference Combined Ratio based on an annual participation rate.

The Result

Hannover Re obtained $100 million in risk capacity and surplus relief to enable the growth of its catastrophe excess of loss, treaty reinsurance business. The transaction was concluded in November of 1996.

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