Global reinsurance giant Munich Re has made a second early redemption of sidecar notes, redeeming the $75.578 million Class A tranche of the Eden Re II Series 2016-1 collateralized sidecar vehicle, which we’re again told is likely due to commutation of underlying retrocession contracts following losses suffered from recent catastrophes.
Just over one week ago we reported that Munich Re had redeemed two classes of notes from its $290 million Eden Re II Series 2015-1 collateralized reinsurance sidecar early, which we’re told took a share of the reinsurers losses from recent major catastrophes around the world.
In that article we said that conversations were ongoing about the future of the Eden Re II 2016-1 issue and whether it too would be commuted. We now understand that to be the case.
Munich Re, like other reinsurers, tends to redeem loss affected sidecar tranches, to either settle the remaining collateral with investors or to roll them forward into new issues from a similar vehicle.
Natural catastrophe losses from hurricanes Harvey, Irma and Maria, as well as the Mexico earthquakes, are estimated to have cost Munich Re $3.8 billion, net of retrocession, for the third-quarter alone, a figure that does not include any losses from the recent California wildfires.
Given the size of these losses Munich Re has been exposed to, it is no surprise that its third-party capital vehicles have taken a share, providing some of the valuable retrocessional protection the reinsurer has benefited from.
So Munich Re has redeemed the $75.578 million Class A Rule 144a tranche of notes from its Eden Re II 2016 reinsurance sidecar issuance and the notes have been delisted from the BSX. The notes were due in April 2019.
The second tranche of this 2016 sidecar from Munich Re, a $284.422 million Class B tranche of Section 4(a)(2) notes, remains in-force for now, we understand.
The reason for the early redemption is unlikely to be a total loss of the tranche of notes. Rather we’re told that the erosion of the tranche by 2017 catastrophe losses makes it preferable to commute the retrocessionl contracts, redeem the tranche, allow investors to exit this particular vehicle, realise their losses and roll forwards into a new sidecar transaction for 2018, should they elect to.
It’s possible that we will see the Class B tranche of the Eden Re II 2016 sidecar issue commuted as well in the coming weeks. It was issued a little later than the A notes and so we may have to wait until its anniversary to see if the notes are redeemed early.
Munich Re continues to discuss a 2018 sidecar issuance, we’re told, which may see investors from these redeemed tranches roll out of loss affected structures and into a fresh vehicle for the year ahead, giving them the opportunity to take advantage of any higher pricing at reinsurance renewals.
This does seem to be a restructuring of the sidecars following some losses, as the original collateralized sidecars have been eroded to a degree making their commutation and redemption an attractive option, with a fresh sidecar issuance said to be on the horizon.
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