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Munich Re’s Eden Re II sidecar shrinks to $131.1m for 2023

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Global reinsurer Munich Re has now added to its collateralized reinsurance sidecar arrangements for 2023, with a second tranche of notes now issued by its Eden Re II Ltd. vehicle, taking the total issued so far around this renewal to $131.1 million.

Each year, Munich Re has tended to sponsor a two tranche issuance of notes from an Eden Re sidecar, with the first coming to market before the end of the year, the second typically Class B tranche emerging in early January.

For 2023, we reported in December that Munich Re’s sidecar vehicle Eden Re II Ltd. had issued a $17.5 million tranche of Series 2023-1 Class A notes.

Now, the reinsurer has completed the two tranche Eden Re sidecar for 2023 it seems, at a downsized from previous years $131.1 million, as the Eden Re II Ltd. special purpose insurer (SPI) has now issued a $113.6 million tranche of Series 2023-1 Class B notes.

Every Eden Re transaction Munich Re has sponsored is detailed in our Reinsurance Sidecar Transaction Directory.

Over the last few years Munich Re’s collateralized reinsurance sidecars have been shrinking.

One driver for this is likely the reduction in insurance-linked securities (ILS) investor appetite for these quota share sidecar arrangements.

Sidecars have been responsible for driving significant losses to some investors, while they have also been perceived as providing very broad cover and having exposure to secondary perils and frequency losses, making them not for everyone.

As a result, reinsurance sidecars have proven more challenging to sponsor at scale in recent years and the price of retrocessional reinsurance coverage has risen.

Munich Re has likely responded to these two factors, reduced investor appetite and higher pricing, steadily scaling down its sidecar arrangements as a result.

A year ago, the two tranche Eden Re II sidecar issuance for 2022 was $190 million in size, a year earlier, for 2021 it was larger still at $235 million, while in 2020 it was $285 million, back in 2019 it was $300 million, around $300 million in 2018 as well, and more than $360 million in size in 2017. You see the trend (details on earlier Eden Re sidecars can be found in our reinsurance sidecar Deal Directory.

Of course, we can’t be certain there aren’t other privately placed sidecar tranches and arrangements, that might make up the difference here. But the trend in a steady shrinking of the traditional two-tranche Eden Re sidecar is clear.

The Eden Re II Ltd. reinsurance sidecar is the latest iteration of the structure. The Eden Re sidecar program began in 2014, with the Eden Re II vehicle introduced for 2016.

These sidecars enable Munich Re to share its underwriting returns (and losses) with ILS and capital market investors, securing a source of fully-collateralized quota share protection by partnering with investors that have an appetite for the type of risks it can cede to them.

Quota share arrangements, such as through a sidecar, can provide capital that drives growth while also moderating PML’s, enabling the reinsurance sponsor to better manage its exposures, particularly in property catastrophe lines.

In recent years, Munich Re has sponsored two tranches of notes issued by its Eden Re II special purpose insurer (SPI).

The Bermuda domiciled reinsurance structure typically brings a first Class A tranche to market in December, while a second, usually larger Class B tranche of notes tend to appear in January, as we’ve seen again for 2023.

Market conditions, price and investor appetite are likely all factors in the shrinking of Munich Re’s Eden Re II sidecar for the year ahead.

This year, the first tranche of reinsurance sidecar notes to emerge from Munich Re was the $17.5 million tranche of Series 2023-1 Class A notes, with maturity due for the privately placed participating notes as of March 19th 2027.

Now followed by this $113.6 million tranche of Series 2023-1 Class B notes, which also have maturity due for the same date, of March 19th 2027.

Eden Re II is still an important feature of Munich Re’s retrocessional arrangements, allowing it to share in the risks and returns of its underwriting with third-party investors and earn fee income in the process.

But, at the size, scale and diversification of a reinsurer like Munich Re, these aren’t always deemed essential and the company has other levers that mean it can use less retro, so a shrinking sidecar is not a significant issue for the company.

It’s worth noting though, that sidecars, like other ILS arrangements, have seen adjustments to their terms and conditions in recent years, which could, in time, make them more appealing again to ILS investors and help reinsurers to grow them as investor appetite rebuilds for the broader collateralized reinsurance and private ILS asset class.

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

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