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Hannover Re - L1 Life Reinsurance Securitization


L1 Securitization of Life Reinsurance Assets - DEM 100,000,000

Background

Hannover Re has achieved substantial growth in its international life and accident reinsurance business over the past few years but has done so by placing a significant financing burden on internal group resources. This was due to the need for Hannover Re to fund the acquisition costs incurred in writing the business, which under German accounting rules cannot be deferred. Hannover Re also incurred technical (underwriting) losses in relation to growing the business, as well as an adverse reserve impact. As a result of its continued growth prospects in the life and accident reinsurance market, Hannover Re management decided that the business required an alternative financing solution going forward.


The Need

Hannover Re retained RISConsulting as its exclusive advisor for the development of a solution that would address the financing burden and accounting impact (P&L and surplus) associated with the reinsurance of new life and accident business. It was also stipulated that the solution take the form of a traditional reinsurance format from a contract perspective, that it cover the subject business (the L1 portfolio) for three years of account (1998, 1999, and 2000) and that it be non-recourse to Hannover Re.


The Solution

RISC developed an innovative risk securitization structure in cooperation with Hannover Re and Rabobank International. Under the structure, Interpolis Re (a Dublin-based Rabobank affiliate) provided Hannover Re with 75% quota-share reinsurance covering the L1 portfolio for three underwriting years of account. To finance its share of the acquisition costs associated with the L1 business, Interpolis entered into a financing arrangement with Rabobank, which provided for repayment of the financing from profits generated by the reinsurance policy (i.e., L1 portfolio profits).


The Result

This life securitization transaction allowed Hannover Re to raise DEM 100 million from external sources for new business acquisition costs and was awarded Reinsurance Industry Deal of the Year (1998) by the Review Magazine.





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