Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Munich Re leverages catastrophe bond market environment to secure higher probability event cover


Munich Re have published some comments on the completion of their latest multiperil catastrophe bond, Queen Street VI Re Ltd. The sixth deal in the Queen Street series of cat bonds, Queen Street VI provides Munich Re with a $100m source of reinsurance protection for two of their peak perils, U.S. hurricane and European windstorms. Munich Re said that they took advantage of current market conditions to issue a cat bond which provides them with coverage for higher probability of occurrence events than their previous transactions.

Queen Street VI Re Ltd. completed successfully earlier this week securing $100m of cover for Munich Re. Interestingly, they say that the cover provides them with protection for losses from extreme events with a combined statistical return period of around 35 years. That’s a fairly risky cat bond in the overall market, as return periods tend to be higher. For example, Munich Re’s previous Queen Street deals have tended to provide cover for lower probability of occurrence events. Queen Street III, Queen Street IV and Queen Street V all were structured to provide cover for events with a combined return period of 50 years, so covering lower probability events than this latest deal.

Munich Re said that the current cat bond market conditions have allowed them to issue a bond with a higher probability of occurrence and they’ve got this latest deal to market paying a coupon of 10.35% which was below the range originally expected. This shows that the cat bond market, and cat bond investors, are becoming more comfortable with taking on higher probability risks for a lower return. That’s likely due to the high investor appetite for insurance-linked securities at this time, but also shows a continuing maturation of the market as it becomes capable of assuming higher levels of risk at competitive prices. For comparison, Munich Re’s Queen Street V Re pays a coupon of 8.5% for a 50 year return period.

So by being intelligent with their cat bond strategy, and playing the market depending on the environment at the time of issuance, Munich Re are able to acquire cover at rates likely lower than (or at least comparable with) the traditional retrocession reinsurance markets for these risks. Munich Re said that the Queen Street VI cat bond notes have been placed globally among a broadly diversified group of international investors mainly comprising investment funds and hedge funds, but also insurers.

Munich Re board member Thomas Blunck said; “Munich Re has taken advantage of the current market environment to acquire coverage against events with a higher probability of occurrence compared with previous transactions. It remains our strategy of selectively using catastrophe bonds as a supplementary means of transferring peak risks from our own book. The response by investors was positive, particularly as the diversifying effect from cat bonds that are virtually uncorrelated with trends on the capital markets as such is even stronger in the current market environment.”

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