The world’s largest reinsurance company Munich Re has withdrawn the issuance of its latest catastrophe bond, Queen Street X Re Limited, as investor appetite was likely not strong enough to get the transaction completed at the size and pricing desired.
Sources suggest that the insurance linked investor community did not have the appetite at this point in the year to buy the Queen Street X Re notes at the very low pricing multiple they were offered at. Timing due to seasonality is likely also a contributing factor, with seasonality now having kicked in on notes containing U.S. wind as this cat bond did, affecting prices in the secondary market and making this offering perhaps look less attractive.
The latest announcement from the bookrunners said simply that the notes would no longer be offered due to current market conditions as the pricing and capacity targets for the cat bond could not be met.
The Queen Street X Re cat bond was seeking to secure fully-collateralized retrocessional reinsurance protection from U.S. hurricanes and Australian cyclones for Munich Re. The protection provided by Queen Street X Re would have been on a per-occurrence basis using a county and line of business weighted PCS industry loss index for U.S. hurricanes and a postcode as well as line of business weighted modelled industry loss index for Australian cyclone risks.
The Queen Street X Re cat bond featured an expected loss of 2.72%, but it launched with very low price guidance of 4.75% to 5.5%. The pricing eventually moved to the top end of that guidance range at 5.5%, as investors showed they were not willing to buy the risk at any cost.
Two previous Munich Re cat bonds, Queen Street VIII and Queen Street IX, both had identical expected loss levels. Those deals completed with pricing of 6.5% for Queen Street VIII Re just over a year ago and 5.5% for Queen Street IX Re in February 2014. The fact that Queen Street IX Re was completed at such a low multiple back in February shows that the failure to launch Queen Street X Re was likely not just to do with the price, but also to do with the timing.
Given the onset of the U.S. hurricane season and the emergence of some seasonality in terms of secondary prices trading down, the deal perhaps did not look as attractive at this time of year even at the 5.5% coupon. That would still have been a multiple of just 2.02 times expected loss, which is low for the market anyway and investors would not have looked as favourably on buying a cat bond at that level which subsequently traded down as soon as it launched due to the U.S. wind element.
The fact that ILS investors in recent weeks have shown a lack of desire to chase cat bond rates prices down any further, having pushed pricing to the upper end of guidance on a number of recent catastrophe bond deals, may also not have helped in Munich Re’s goal of getting this deal to market at this point of the year.
A number of investors we’ve spoken with did not have orders in for this bond, feeling the pricing and timing were not conducive to its purchase. One source told us that had this deal been launched even a month earlier it likely would have been completed, as the successful issuance of the February Queen Street IX at the same expected loss, price and multiple.
Of course, it is possible that Munich Re had wanted to secure a much larger amount of cover with this cat bond and had just not been able to get sufficient interest, due to the factors above, making it look uneconomical to the reinsurer. However sources suggest that this would not have been much larger than $100m, had it been successfully issued. Munich Re will likely either turn to the traditional market or perhaps even not cover this layer of its retro programme.
So that now looks like it for the second-quarter of 2014 in terms of catastrophe bond issuance, unless a private deal emerges in the next few days. We’ll be removing Munich Re’s Queen Street X Re Limited from the Deal Directory shortly, but you will be able to read all about it in our articles on the transaction.