Hannover securitizes its retro risk

HANNOVER, Germany—Hannover Re Group is securitizing e1 billion ($1.31 billion) of its reinsurance recoverable risks in an attempt to reduce its default risk.

The transaction represents the first time a so-called fully secured, synthetic collateralized debt obligation structure has been applied to a portfolio of credit risks associated with insurers and reinsurers, according to the reinsurer. Hannover worked with Paris-based corporate investment bank Societe Generale in structuring the deal.

Under the structure, Hannover Re's credit risk from its retrocessional coverage placed with other reinsurers is transferred to a special-purpose entity through a credit default swap.

The special entity used by Hannover Re is Merlin CO 1 B.V., which is domiciled in the Netherlands. Merlin will issue notes that are credit-linked to a portfolio initially comprising about 100 entities whose business relates wholly or partly to insurance or reinsurance, according to a Feb. 5 presale report prepared by rating agency Standard & Poor's Corp.

At closing, the note proceeds will be invested in a guaranteed investment contract.

The securities issued as collateral through Merlin are split into four tranches rated AAA, AA, A and BBB by S&P and have a scheduled maturity of five years. A payment to Hannover Re, after allowance for its deductible, is triggered by a retrocessionaire's insolvency.

"With this transaction, Hannover Re has effectively immunized itself against a potential credit risk," explained Hannover Re Chief Executive Officer Wilhelm Zeller in a statement.