Swiss Re Insurance-Linked Fund Management

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Munich Re returns with Queen Street XII Re 2016 cat bond


Global reinsurance company Munich Re is returning to the capital markets with a new issuance, as it seeks to expand its capital markets sources of retrocession through a (currently) $100m Queen Street XII Re dac 2016 catastrophe bond transaction.

We understand that the reinsurer will use Queen Street XII Re dac, a newly registered Irish special purpose vehicle, to issue a tranche of catastrophe bond notes exposed to U.S. hurricanes and European windstorm risks which will be sold to investors to collateralise an underlying retrocessional reinsurance agreement.

Through the transaction, Munich Re will gain a new source of retrocessional reinsurance covering industry losses from the two covered perils, U.S. hurricanes and European windstorms, on a per-occurrence basis over four seasonal risk periods for each peril.

Currently sized at $100m for marketing purposes, according to sources, this Queen Street XII Re dac 2016 cat bond is Munich Re’s first of the year. Typically the reinsurer visits the cat bond market twice a year, the last visit being December when it sponsored the $100m Queen Street XI Re dac 2015.

This is set to be the first catastrophe bond sponsored by Munich Re which provides European windstorm coverage since 2012’s Queen Street VII Re Ltd, which matured earlier this month.

In recent years the reinsurer has focused on U.S. hurricane and Australian cyclone cover. But with the recent maturity of Queen Street VII on the 8th April 2016 this Queen Street XII Re deal sees European wind risk retrocession back on the agenda for Munich Re.

So Queen Street XII Re will provide Munich Re both collateralised U.S. hurricane and European windstorm retrocessional reinsurance coverage, across four-peril seasons, on an industry loss and per occurrence basis.

We understand the industry loss triggers are being provided by PCS, for the county and line of business-weighted index for U.S. hurricane risks, and PERILS AG, for the Cresta zone weighted index for European windstorm risks.

We understand that the single tranche of series 2016 notes issued by Queen Street XII Re dac will have an attachment probability of 3.53% and an expected loss of 2.71%. The notes are being offered to investors with spread guidance in a range from 5.75% to 6.25%, we’re told.

So that would result in a multiple paid to investors of 2.2 times the expected loss at the mid-point of price guidance, a multiple that drops to just over 2 times the expected loss at the warm sea-surface temperature (WSST) scenario expected loss of 2.9%.

Interestingly, the Queen Street VII Re cat bond from 2012 which covered the same perils had the same expected loss at 2.71% and paid investors a coupon of 8.6%. So three and a half years later, if this new Queen Street XII Re cat bond prices around 6% it represents a 30% lower coupon than the recently matured deal.

That seems like a reasonable price decrease, given the softening of the global reinsurance and retrocession markets has been comparable over that period of time.

Munich Re itself is structuring this cat bond deal, sources said, while GC Securities is acting as sole bookrunner. AIR Worldwide is risk modelling agent for the transaction.

We understand that Munich Re is aiming to have this new catastrophe bond completed in just over two weeks, so launching it during May in plenty of time for the beginning of the next U.S. hurricane season.

You can read all about the Queen Street XII Re dac cat bond and every other transaction in the Artemis Deal Directory.

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