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Insurance-Linked Securities

Demand for ILS products on the capital market and among investors from the traditional reinsurance and primary insurance market was undiminished despite the losses that were recorded in the year under review. Thus, for example, we were able to increase our “K” quota share – a securitisation consisting of non-proportional reinsurance treaties in the property catastrophe, aviation and marine (including offshore) lines that we have placed on the ILS market for almost 20 years – by around USD 20 million for 2012 to USD 350 million. The capital losses incurred by investors in the extremely costly 2011 financial year were offset by funds reinvested by existing investors as well as shares taken out by new investors.

In addition to protecting our own property catastrophe risks, we use the capital market to structure and package risks for our cedants. We also take the role of investor ourselves by investing in catastrophe bonds. In contrast to prices for traditional reinsurance, catastrophe bonds did not see any comparable price rises – hence boosting the competitiveness of these instruments. Still, these effects have not yet led to any significant increase in new issues of catastrophe bonds.

The year under review brought a strong inflow of cash into the ILS market. Investors find this market interesting because it has no correlation to the other risks associated with the traditional capital market, such as interest rate risks, and it therefore promotes diversification of asset portfolios. Nor did the heavy losses incurred by investors in the year under review, most notably in Japan, curtail investment activity. The available funds comfortably exceeded the opportunities for new investments in catastrophe bonds. This prompted investors to search for further investment possibilities in the reinsurance sector, for example by way of Industry Loss Warranties and so-called Collateralised Reinsurance Programmes. In the latter case the investor assumes reinsurance risks that are normally collateralised in the amount of the limit of liability.

With its product range Hannover Re enables investors to enjoy optimised and customised access to, inter alia, non-life reinsurance risks through collateralised reinsurance. We continued to expand this segment in the year under review. In addition, we are working on concepts for the transfer of life reinsurance risks to the capital market.

Following the expiry of our FacPool Re transaction, under which we transferred facultative risks to the capital market in 2009, our premium volume in the area of insurance-linked securities contracted in the year under review. The result fell short of the previous year on account of the worldwide claims situation.

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