Hannover Rueck SE · XETR:HNR1
Hannover Rueck — Hannover Re — Investor Day (June 2006)
41 slides from Hannover Rueck's investor day presentation, Jun 23, 2006
Slide 1: Risk Management - How to Quantify Retrocession Default Risk?
Risk Management - How to Quantify Retrocession Default Risk? Trevor Bolt Director Group Protections 9th International Investors' Day ® London, 23 June 2006 hannover re
Slide 2: Active Risk Management in Group Protections: An Overview
Cession limits Cession limits Default risk Basics ACTIVE RISK MANAGEMENT IN GROUP PROTECTIONS An overview Æ Combining a quantitative and qualitative approach in one system Æ Business partner data such as external rating (A.M. Best and S&P), internal classification and shareholders' funds (Lloyd's st
Slide 3: Step 1: Definition of Exposure
Cession limits Cession limits Default risk Basics STEP 1: DEFINITION OF EXPOSURE Definition: ´ All in-force outward cessions world/group wide Exposure ´ For proportional cessions ´ 100% of expected premium ´ For non-proportional cessions ´ 1 limit ´ Structured treaties ´ risk amount ´ Facultative tr
Slide 4: Step 2: Definition of Outstanding Recoverables
Cession limits Cession limits Default risk Basics STEP 2: DEFINITION OF OUTSTANDING RECOVERABLES Definition: ´ All outwards outstandings Recoverables ´ Reduced by collaterals e.g. deposits, letters of credit Cession limits Web-application ® hannover re 3
Slide 5: Step 3: Definition of Open Balances of Receivables
Cession limits Cession limits Default risk Basics STEP 3: DEFINITION OF OPEN BALANCES OF RECEIVABLES Definition: Æ Open balances due to Hannover Re Group Receivables (Due to data restrictions we include all Home Office open balances, both inwards and outwards) Cession limits Web-application ® hannov
Slide 6: Three Elements of Our Active Risk Management
Cession limits Cession limits Default risk Basics THREE ELEMENTS OF OUR ACTIVE RISK MANAGEMENT Exposure Recoverables Receivables Cession limits Web-application ® hannover re 5
Slide 7: Bond Default Rate Based on Rating Agencies' Figures
Cession limits Cession limits Default risk Basics BOND DEFAULT RATE BASED ON RATING AGENCIES' FIGURES Æ Probability of default is based on S&P/Moody's/Fitch figures (adjusted by our actuarial department). Figures from A.M. Best are not available as they measure "impairment" only. Æ Probability of de
Slide 8: Rating Factor and Maximum Cession Capacity
Cession limits Cession limits Default risk Basics RATING FACTOR AND MAXIMUM CESSION CAPACITY Æ For grade definition, we use A.M. Best for U.S./Canada/Bermuda partners and S&P for the rest of the world Æ Our security department arrives at internal classification taking additional soft information int
Slide 9: An Actual Calculation Sample
Cession limits Cession limits Default risk Calculation AN ACTUAL CALCULATION SAMPLE ® hannover re 8
Slide 10: An Actual Calculation Sample (cont'd)
Cession limits Cession limits Default risk Calculation AN ACTUAL CALCULATION SAMPLE (CONT'D) Æ As the business partner is located in the U.S., the rating used is that from A.M. Best Æ A+ = rating grade 3 Grade AM BEST S&P 1 A++ AAA 2 AA+ 3 A+ AA 4 AA- 5 A A+ 6 A 7 A- A- 8 BBB+ 9 B++ BBB 10 below bel
Slide 11: An Actual Calculation Sample (cont'd)
Cession limits Cession limits Default risk Calculation AN ACTUAL CALCULATION SAMPLE (CONT'D) Cession limit for S/M/L can now be calculated ® hannover re 10
Slide 12: An Actual Calculation Sample (cont'd)
Cession limits Cession limits Default risk Calculation AN ACTUAL CALCULATION SAMPLE (CONT'D) ® hannover re 11
Slide 13: An Actual Calculation Sample (cont'd)
Cession limits Cession limits Default risk Calculation AN ACTUAL CALCULATION SAMPLE (CONT'D) Æ Exposure "S" Sum = EUR 8,566,217 Æ Exposure "M" Sum = EUR 8,965,999 ® hannover re 12
Slide 14: An Actual Calculation Sample (cont'd)
Cession limits Cession limits Default risk Calculation AN ACTUAL CALCULATION SAMPLE (CONT'D) ® hannover re 13
Slide 15: An Actual Calculation Sample (cont'd)
Cession limits Cession limits Default risk Calculation AN ACTUAL CALCULATION SAMPLE (CONT'D) Æ Inwards outstandings are "for information only" (to show offset potential) Æ Sum exposed outstandings = EUR 31,982,003 ® hannover re 14
Slide 16: An Actual Calculation Sample (cont'd)
Cession limits Cession limits Default risk Calculation AN ACTUAL CALCULATION SAMPLE (CONT'D) ® hannover re 15
Slide 17: An Actual Calculation Sample (cont'd)
Cession limits Cession limits Default risk Calculation AN ACTUAL CALCULATION SAMPLE (CONT'D) Æ Home Office: Due to data detail restrictions open balances are offset Æ Sum open balances = EUR 13,762,960 ® hannover re 16
Slide 18: An Actual Calculation Sample (cont'd)
Cession limits Cession limits Default risk Calculation AN ACTUAL CALCULATION SAMPLE (CONT'D) Æ Max. capacity = Shareholders' fund * Rating factor ® hannover re 17
Slide 19: An Actual Calculation Sample (cont'd)
Cession limits Cession limits Default risk Calculation AN ACTUAL CALCULATION SAMPLE (CONT'D) ® hannover re 18
Slide 20: Coming to Default Risk
Cession limits Default risk Default risk COMING TO DEFAULT RISK We will now look at the probability of default ® hannover re 19
Slide 21: Active Risk Management of Default Risk: An Overview
Cession limits Default risk Default risk ACTIVE RISK MANAGEMENT OF DEFAULT RISK An overview Æ 2002: Following World Trade Center loss and revised outlook of rating agencies in respect of reinsurance recoveries, need to analyse default probability in detail Æ Internal risk management focuses on quali
Slide 22: Step 1: Exposure
Cession limits Default risk Default risk Basics STEP 1: EXPOSURE Our definition: Æ All outward cessions of the group Æ For proportional cessions, the premium Exposure Æ For non-proportional cessions, the limit Æ For structured cessions the amount of risk Æ Facultative treaties 10% per risk Cession l
Slide 23: Step 2: Recoverables
Cession limits Default risk Default risk Basics STEP 2: RECOVERABLES Our definition: Æ All outstandings and IBNR Recoverables Æ Reduced by reinstatement premium reserves (for default calculation only) Æ Reduced by collaterals e.g. deposits, LOC Cession limits Web-application ® hannover re 22
Slide 24: Step 3: Receivables
Cession limits Default risk Default risk Basics STEP 3: RECEIVABLES Our definition: Æ Open balances due to Hannover Re Group Receivables Æ Offset inwards and outwards business assumed Cession limits Web-application ® hannover re 23
Slide 25: Combination of the Three Elements
Cession limits Default risk Default risk Basics COMBINATION OF THE THREE ELEMENTS Evaluation? Exposure Recoverables Receivables How do we evaluate these figures ? Cession limits Web-application ® hannover re 24
Slide 26: Probability of Default Distribution
Cession limits Default risk Default risk Basics PROBABILITY OF DEFAULT DISTRIBUTION Æ Probability of default distribution published in a Benfield article Æ Probability of default depends on the tail of the business (short, medium, long) and rating grade of retrocessionaire Rating Year Grade A.M. Bes
Slide 27: Calculated Default: An Example
Cession limits Default risk Default risk Calculation CALCULATED DEFAULT An example Business partner X, USA, UIN: US 100-XXX-XXX, SICS Nr: XXXXXX S&P: AA- A.M. Best: A+ Grade: 3 Internal class.: L Exposure HO, S EUR 4,133,598 x 0.0950% = EUR 3,927 Exposure Clarendon, S EUR 13,587,136 x 0.0950% = EUR
Slide 28: Calculated Default (cont'd)
Cession limits Default risk Default risk Calculation CALCULATED DEFAULT (CONT'D) An example Business partner Y, Germany, UIN: DE 100-XXX-XXX, SICS Nr: XXXXXX S&P: A+ A.M. Best: A+ Grade: 4 Internal class.: L Exposure HO, M EUR 5,993,717 x 0.4355% = EUR 26,103 Exposure Clarendon, S EUR 6,613,756 x 0.
Slide 29: Total Default Risk for All Cessions
Cession limits Default risk Default risk Group basis CALCULATED DEFAULT (CONT'D) Total default risk for all cessions Exposure Receivables 23% 26% Exposure: EUR 26,351,052 Recoverables: EUR 57,170,899 Receivables: EUR 30,005,209 Σ EUR 113,527,159 Recoverables 51% ® Calculated as per 31 March 2006 han
Slide 30: Total Default Risk Split by Grade
Cession limits Default risk Default risk Group basis CALCULATED DEFAULT (CONT'D) Total default risk split by grade S&P: AA- ´ Grade: 4 S&P: BBB- ´ Grade: 10 60,000,000 in EUR 53,735,425 50,000,000 40,000,000 29,783,633 30,000,000 20,000,000 17,386,323 10,000,000 4,921,871 4,042,858 2,472,568 962,906
Slide 31: Total Default Risk Split by Exposure
Cession limits Default risk Default risk Group basis CALCULATED DEFAULT (CONT'D) Total default risk split by exposure Remainder Inter 2% Hannover 14% Home Office: EUR 8,771,132 Home Office 33% Clarendon: EUR 13,496,657 Inter Hannover: EUR 3,609,413 Remainder: EUR 455,850 Σ EUR 26.351.052 Clarendon 5
Slide 32: Total Default Risk Split by Recoverables
Cession limits Default risk Default risk Group basis CALCULATED DEFAULT (CONT'D) Total default risk split by recoverables Home Office 37% Home Office: EUR 21,032,506 Clarendon: EUR 36,138,393 Clarendon Σ EUR 57,170,899 63% ® Calculated as per 31 March 2006 hannover re 31
Slide 33: Total Default Risk Split by Receivables
Cession limits Default risk Default risk Group basis CALCULATED DEFAULT (CONT'D) Total default risk split by receivables Home Office: EUR 18,011,558 Clarendon 40% Clarendon: EUR 11,993,651 Home Office Σ EUR 30,005,209 60% ® Calculated as per 31 March 2006 hannover re 32
Slide 34: How Will Figures React to the Following Scenarios?
Cession limits Default risk Default risk Scenarios HOW WILL FIGURES REACT TO THE FOLLOWING SCENARIOS? Æ Scenarios: • Total loss for marine, aviation, whole account or average loss ratio • Worsening of payment behaviour • Downgrade for all retrocessionaires • Recovery rate after bankruptcy or closure
Slide 35: Small Increase Equals Top Security: Marine
Cession limits Default risk Default risk Scenarios SMALL INCREASE EQUALS TOP SECURITY Marine: Simulated loss causing increase in recoverables Æ Marine: Platform explosion with a market loss of USD 2.65 bn. Æ Total loss for marine whole account, offshore energy and limited clash protections ´ collect
Slide 36: Small Increase Equals Top Security: Aviation
Cession limits Default risk Default risk Scenarios SMALL INCREASE EQUALS TOP SECURITY Aviation: Simulated loss causing increase in recoverables Æ Aviation large loss with a market loss of EUR 3.0 bn. Æ Affecting all original loss warranties and aviation general protection ´ collection of USD 268.5 m
Slide 37: Small Increase Equals Top Security: Nat. Catastrophe
Cession limits Default risk Default risk Scenarios SMALL INCREASE EQUALS TOP SECURITY Nat. catastrophe: Simulated loss causing increase in recoverables Æ Natural catastrophe scenario similar to hurricane Katrina Æ Total losses for whole account protection and cat. protection Clarendon ´ collection E
Slide 38: Even in Worst Case: Manageable Amount
Cession limits Default risk Default risk Scenarios EVEN IN WORST CASE: MANAGEABLE AMOUNT Loss to all protections Æ Average loss ratio over the last 20 years 29.2% (including 2005) 70.000.000 64,865,406 in EUR 7,694,507 60.000.000 57,170,899 50.000.000 40.000.000 ss s 30.000.000 lo os e l for te r f
Slide 39: Worsening of Payment Behaviour
Cession limits Default risk Default risk Scenarios WORSENING OF PAYMENT BEHAVIOUR Delay in payment causing increase in default risk Æ Current assumption: All receivables paid within 12 months Æ As if assumption: All receivables paid within 3 years 60.000.000 55,852,336 in EUR 50.000.000 25,847,128 4
Slide 40: Downgrade Equals Increase in Default Rate
Cession limits Default risk Default risk Scenarios DOWNGRADE EQUALS INCREASE IN DEFAULT RATE Downgrade of all retrocessionaires by 1 and 2 grades respectively 140 in m. EUR 130.4 121.0 120 113.5 31.1 30.3 100 30.0 80 66.1 60 61.5 57.2 40 20 33.2 26.3 29.2 Calculated figures Grade + 1 Grade + 2 Expos
Slide 41: Calculated Default Less Than 0.3%
Cession limits Default risk Default risk Scenarios CALCULATED DEFAULT LESS THAN 0.3% Best security brings lowest risk Æ Our worst case scenario includes a loss ratio of 29.2% for all current cessions, all receivables paid within 3 years and a downgrade by 2 grades Æ Assumption of a recovery rate of