Reinsurance giant Munich Re has made an early redemption of the two classes of notes from its $290 million Eden Re II Series 2015-1 collateralized sidecar vehicle, which we’re told is likely due to commutation of underlying retrocession contracts following losses from recent catastrophe events.
The late 2014 issuance from the Eden Re II Ltd. Bermuda domiciled special purpose insurance vehicle and segregated accounts company, saw reinsurer Munich Re looking to gain support from capital market investors by enabling them to invest in the performance of a portion of its catastrophe risk portfolio.
The issuance saw Eden Re II selling a $248 million tranche of non-voting right notes and $42 million of voting right notes to investors, adding up to the $290 million of collateralized retro protection it had sources through this sidecar like deal.
The investors were exposed to the main peak peril loss events that could impact Munich Re, so providing the reinsurance firm with an efficient source of additional protection across its book, while at the same time enabling the investors to participate in the reinsurers underwriting results.
Recent natural catastrophe losses are estimated to have resulted in industry losses of anything up to $100 billion and Munich Re’s share net of retrocession was pegged at $3.8 billion for the third-quarter alone, so without factoring in any losses from the recent California wildfires.
Given the size of the losses that the reinsurer has been exposed to recently, it is no surprise to learn that its third-party capital vehicles have taken a share, providing some valuable retrocessional protection for Munich Re.
A source said that the Eden Re II 2015 structure has likely been commuted, or at least the underlying retrocession contracts with the reinsurer, given the size of the losses, allowing investors to exit the vehicle and cut their losses, while Munich Re can secure a payout of what it is owed.
This could be because after some losses it is more effective to commute the vehicle and allow investors to roll into a newer tranche of notes, which has been the strategy with some reinsurance sidecar issuers in the past.
Or it could be that the losses are large enough such that maintaining the vehicle becomes less viable than it had been. Remember that the Eden vehicles enter into retro agreements direct with Munich Re, so a commutation is less technical than when a third-party group is involved.
Hence the two classes of Eden Re II 2015 notes have been delisted from the Bermuda Stock Exchange (BSX) yesterday, following their early redemption. The notes had originally been due through to mid-April 2018.
But we’re also told by our sources that Munich Re’s sidecar restructuring following the recent catastrophe losses is unlikely to stop at the Eden Re II 2015 vehicle.
Sources said that the $360 million Eden Re II 2016-1 sidecar has taken catastrophe losses as well and that discussions on the commutation of this vehicle have begun.
Again, it’s not possible to know the size of the losses to the Eden Re II 2016 sidecar transaction, but it’s understood that conversations with investors about the commutation of at least one of the tranches issued continue.
The 2016 Eden Re II sidecar issuance featured $75.578 million of Class A Rule 144a notes and $284.422 million of Section 4(a)(2) notes, all of which are exposed to Munich Re’s catastrophe loss experience.
We’re told that discussions are also underway at Munich Re about a potential 2018 sidecar issuance, which could give investors an opportunity to roll out of loss affected structures and into a fresh vehicle, which could then take advantage of any availability of higher pricing at renewals.
So overall, this could be more of a restructuring than a major loss, although we can’t confirm that, with the fact the original collateralized sidecars have been eroded to some degree meaning that it makes more sense to seek their commutation and redeem them, with a fresh sidecar issuance also in mind for the future.
It will be interesting to see whether Munich Re makes greater use of capital market investors appetite for reinsurance linked investments with a fresh sidecar issuance towards the end of this year. The opportunity may be there to come out with a much larger collateralized reinsurance sidecar vehicle for 2018.
Join us in New York in February 2018 for our next ILS conference