Munich Re cites “valuable” capital market risk transfer with sidecar & cat bond

by Artemis on January 14, 2016

Global reinsurance company Munich Re said today that it has increased its use of the capital markets as a source of efficient capital for risk transfer and retrocession, citing the coverage provided by its Eden Re II sidecar renewal and recent Queen Street cat bond as “valuable”.

“The current market environment made both transactions attractive for investors, which at the same time made the risk transfer valuable for us,” Munich Re board member Thomas Blunck explained.

Munich Re has been steadily increasing the role that the capital markets and insurance-linked securities (ILS) investors and funds play in its business, both from a protection point of view through the collateralised reinsurance sidecars and catastrophe bonds, but also through facilitation of ILS deals as well.

The reinsurer has previously acknowledged that the capital markets would play a growing role in its business and the recent transactions demonstrate this to be true.

For Munich Re, both the Eden Re II Ltd. sidecar and the Queen Street XI Re dac catastrophe bond provide retrocessional protection for some of the natural catastrophe exposure in its book of reinsurance business.

The Eden Re II Ltd. sidecar renewal transaction saw $360m of Series 2016-1 notes issued to investors in two tranches. One $75.758m Class A tranche of notes was broadly marketed to ILS investors, while a second, larger, $284.422m Class B tranche was offered privately to existing investors in the reinsurers Eden Re sidecar vehicles.

The proceeds of the sale of the two tranches of Eden Re II notes provide Munich Re with retrocessional protection across a risk period from 1st January to 31st December 2016. The risk is transferred to investors through quota-share retrocession agreements, with pro-rata sharing of risk and premiums.

Eden Re II allows Munich Re to transfer a share of its book of non-proportional covers for property catastrophe treaties, with exposure mainly to natural catastrophe events in North America and Australia. Investors in the notes receive a corresponding share of premiums, according to the reinsurer.

As a result, investors in Eden Re II follow Munich Re’s underwriting in full. Munich Re retains a majority of risk exposure from this book of business, demonstrating full-alignment with the investors as the reinsurer benefits from the injection of efficient capital markets capacity.

For 2016 the Eden Re II sidecar grew by 24% from $290m for 2015, to the $360m for 2016. However, in 2015 Munich Re also had a $75m tranche of Eden Re I Ltd. notes in effect, so actually the sidecar coverage has not changed much year-on-year.

Meanwhile the latest Queen Street catastrophe bond from Munich Re, which is the reinsurers thirteenth cat bond to use the name and twentieth time the firm has been mentioned in our cat bond Deal Directory, completed in December as well.

Queen Street XI Re dac provides Munich Re with another capital markets source of retrocession, in this case $100m of collateralised protection for losses from U.S. hurricanes or Australian cyclones across three U.S. wind seasons and almost four cyclone seasons in Australia.

Munich Re explains that the cat bond helped it to obtain coverage for “losses from extreme events with a statistical return period of between 65 and 85 years per event.”

Munich Re structured and arranged both of the capital market transactions itself, while Deutsche Bank Securities was the bookrunner in both cases.

It’s encouraging that Munich Re continues to find the capital markets and ILS investors a useful and valuable source of retrocession. As the importance of capital efficiency increases, as the reinsurance cycle remains softened and flatter than before, using efficient capital alongside its own balance-sheet could become increasingly important for large reinsurers.

For more details on Munich Re’s Eden Re II Ltd. 2016-1 collateralised reinsurance sidecar renewal read our previous articles:

Munich Re to renew Eden Re II reinsurance sidecar for 2016.

Munich Re renewing Eden Re II reinsurance sidecar at $360m.

Munich Re lists 144a tranche of Eden Re II reinsurance sidecar on BSX.

Munich Re lists Eden Re II sidecar Class B Section 4(a)(2) notes on BSX.

For more details on reinsurance sidecar investments and transactions view our list of collateralized reinsurance sidecars.

For more details on the reinsurers $100m Queen Street XI Re dac catastrophe bond, as well as every other cat bond sponsored by Munich Re, visit the Artemis Deal Directory.

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