Hannover Re embeds securitisation process

Hannover Re has used European Embedded Value (EEV) as a key component of EUR100 million securitisation, which transferred all risks from a portfolio of Austrian and German life policies to a counterparty.

The L6 transaction - so called because it follows five other life policy securitisations by Hanover Re since the 1990s -was offered as an unrated private placement to a European bank and is intended to release capital to fund new business.

Regina Kielich, associate director of Hannover Re, said that by using the top down Capital Asset Pricing Model (CAPM) to carry out a securitisation of a 50:50 split of this life portfolio, it demonstrated the importance of EEV in taking business decisions.

"What this transaction really does is signify to the market that EEV is more than just an actuarial stipulation, but constitutes a tangible asset that can be monetised under attractive terms and conditions. And with a portfolio that dates back to the underwriting year 1999, it also demonstrates that it is possible to take value from old books of business."

But though the L6 transaction does involve the realisation of future value from a pool of similar assets, Kielich said it contained elements that meant it was not a true securitisation.

"This transaction does include the transfer of all possible risks to the other party, but it is not really a securitisation, as it was sold to another reinsurer - which funded the transaction via a loan from its investment bank parent company.

"It didn't go onto general sale and in fact it is only really the capital market involvement that distinguishes it from a standard reinsurance deal."

Although the deal comes at the same time as Hannover Re's parent company Talanx is bidding for German domestic insurance group Gerling, Kielich said that the two actions were unconnected.

Hannover Re was a pioneer of insurance company securitisations and completed the first securitisation of natural disaster risks in 1994. Including transactions L1-6, it has launched a total of 12 securitisations so far, and Kielich said she expected this financial tool to be used again.

"This won't be the last such deal from the life portfolio and I expect further transactions to be announced before the end of 2006."

The latest new business figures for Hannover Re show that in 2004 it generated EUR200 million of life business in Germany alone - the company has no separate figures for Austria.

In addition to writing new business directly, Hannover Re also buys in blocks of life policies from primary insurers in Germany, but it declined to say where it obtained the policies that formed this latest securitisation.