News. 6th ILS Round Table in Monte Carlo hosted by Munich Re. Save the Date To discuss the state and future of the ILS market

Transcription

1 Insurance-Linked Securities (ILS) Market Update Q1

2 News 6th ILS Round Table in Monte Carlo hosted by Munich Re Save the Date To discuss the state and future of the ILS market 15 September 1. a.m. 11. a.m. The Fairmont Hotel Room Sale D Or II Rendez-Vous de Septembre, Monte Carlo Join us on this exciting and informative event, with a mixed panel of major representatives from the ILS community sharing their individual views on issuance activity, key developments in ILS structures, pricing, cat modeling and ILS portfolio management, and specific topics raised by the audience. Please visit also our website for more information:

3 Market Review Outstanding capacity provided by cat bonds shrinks due to overhang of maturities After growing by more than $3.5bn in 213 due to continued capital inflows, the ILS market has lost some momentum during the first quarter of, when maturities of $2.1bn exceeded new issuances of $1.5bn. Of the capital returned to investors by expiring bonds, $785m came from bonds providing retrocession cover for reinsurers, which for the most part were not renewed. In addition, some primary insurers went ahead during Q4 213 to preemptively renew cat bonds maturing in Q1. As a result, the market s total size in terms of outstanding capacity decreased from $19.1bn at the end of 213 to $18.6bn on March 31,. ILS Market In- and Outflows ($m)* 1,876 19,147 2,72 1,535 18,61 1, ,31 2,54 2, , Outstanding Maturities Issuances Year-end 212 Q1 213 Q2 213 Q3 213 Q4 213 Year-end 213 Q1 YTD * Excluding mortality transactions; cat bonds with Euro-denomination were converted into $-amounts using the exchange rate on the respective day of issuance Aside from Munich Re s Queen Street IX Re, Aetna s new issuance from the Vitality Re health securitization program, and Tokio Marine s Kizuna Re II, all other cat bonds placed during the first quarter came from primary insurers buying protection for US nat cat risks. Chubb and State Farm underlined their position as repeat sponsors in the market with large-sized issuances out of their East Lane Re and Merna Re cat bond programs, respectively, while American Strategic and General American each tapped the ILS market for the first time. In addition, the market continued to see some private club deal transactions, namely Tokio Millenium s Omamori Re and Cincinnati Financial s Skyline Re, which renewed an expiring cover. Notably, all US cat bonds (aside from Merna Re V) included coverage for Severe Thunderstorm, some on a per occurrence basis and others as an annual aggregate structure. Munich Re ILS Market Update Q1 1

4 Market Review Placement environment with upsized transactions and pricing below initial guidance persists through first quarter of The ongoing inflow of capital in 213 saw a placement environment in which many sponsors were able to upsize their cat bond volumes and lock in pricing at or below the low end of initial price guidance. With significant maturities during Q1 leading to a strong need for reinvestment among cat funds, it comes as no surprise that issuances during the last three months were again oversubscribed, allowing sponsors to upsize bond volume beyond initially targeted capacity and/or push risk spreads below initial guidance. Pricing and Volume of ILS Issuances in YTD Initial Volume Guidance ($m) Issuance Volume ($m) Initial Spread Guidance High (bps) Initial Spread Guidance Low (bps) Final Risk Spread (bps) Vitality Re V Class A Vitality Re V Class B Queen Street IX Re East Lane Re VI Gator Re Kizuna Re II Class A Kizuna Re II Class B Merna Re V Riverfront Re 2 Munich Re ILS Market Update Q1

5 Market Review Despite the downturn in overall outstanding capacity due to an excess of maturities, Q1 is the busiest first quarter in the history of the ILS market, as total issuance of $1,535m slightly outpaced the so far highest Q1 issuance of $1,493m in 212. Q1 ILS Issuance Volume ($m)* 1,8 1,6 1,4 1,2 1,163 1,493 1,245 1,535 1, 1, Initial Volume Guidance Final Issuance Volume * Excluding mortality transactions; cat bonds with Euro-denomination were converted into $-amounts using the exchange rate on the respective day of issuance Munich Re ILS Market Update Q1 3

6 Market Outlook Sponsors expected to catch up on issuances in the second quarter Maturities of $1.4bn during the second quarter point to a strong deal pipeline during the coming months. Furthermore, Munich Re expects some sponsors with nonrenewed first quarter maturities to catch up on their cat bond issuance during the second quarter. Overall issuance for Q2 should therefore lie north of $2bn. Looking ahead to year-end we expect several issuances from mainly US insurers, as the bulk of maturities in the first quarter of 215 are scheduled for the beginning of January and many sponsors will attempt to lock in their protection prior to the corresponding maturity. Upcoming Cat Bond Maturities ($m)* Expected loss (%) Q2 Q3 Q4 Q1 215 Q2 215 US Wind 1,184 Multi-peril/-region 229 Total 1,413 US Earthquake 15 Europe Wind 15 Japan Wind 16 Total 46 US Earthquake 2 Multi-peril/-region 15 Total 35 US Wind 43 US Earthquake 15 US Multi-peril 1,97 Multi-peril/-region 123 Europe Wind 347 Japan Earthquake 3 Health 15 Total 3,47 US Wind 4 US Multi-peril 25 Multi-peril/-region 765 Europe Wind 67 Total 1,482 US Multi-peril Health Japan EQ/Wind Multi-peril Multi-region Europe Wind US Wind US Earthquake * Cat bonds with Euro-denomination were converted into $-amounts using the exchange rate on the respective day of issuance 4 Munich Re ILS Market Update Q1

7 Market Outlook Funds expected to experience a downturn in capital inflows if rates remain at current levels Current traded yields in the secondary market indicate ongoing favorable conditions for both US and non-us perils, with the latter benefitting from the continued need for diversification among dedicated cat funds. For instance, secondary trading currently implies a 275 basis point return requirement from investors for a Japan Earthquake bond with a 1-year return period. Cat Bond Pricing Forecast* Risk spread (bps) 1, US Wind US Earthquake Japan EQ/Wind Europe Wind Other Non-US 3 2 1,5 1 1,5 2 2,5 3 3,5 4 4,5 5 Expected loss (%) * Fitted curves based on implied yields of recent secondary market risk trades, seasonally adjusted where applicable That said, many funds have been able to attract further capital from end investors thanks to the performance of ILS investments from the years , which were priced at higher rates than recent issuances. With these bonds generating mark-tomarket gains over the last two years as yields tightened substantially, cat funds were able to show increased portfolio values to attract further capital from end investors. A look at upcoming maturities on page 4 reveals that the majority of these bonds are set to expire during the first half of 215, which will lead to a deterioration in forward performance for cat funds and likely induce a reduction in new capital inflows to the market and a corresponding adjustment of rates. Munich Re ILS Market Update Q1 5

8 Market Outlook Sponsors seek to save on transaction costs Aside from moving from synthetic, non-indemnity covers towards customized indemnity-based transactions over the last few years, the market is recently experiencing a push towards more cost-efficient structuring processes. In an effort to reduce transaction expenses associated with ILS issuances, many sponsors have successfully tested investor appetite for unrated cat bonds, including Munich Re with its latest Queen Street and Queen City transactions. As a result, 67% of total issuance in YTD has come from unrated transactions. We expect sponsors to continue pushing for improved cost structures during 215, with potential implications for fee levels of cat bond service providers. Rated vs. Unrated Cat Bond Issuances S&P Moody s Unrated % YTD * Excluding Mortality transactions; cat bonds with Euro-denomination were converted into $-amounts using the exchange rate on the respective day of issuance 6 Munich Re ILS Market Update Q1

9 Market Factsheet Cat Bond Risk Spreads (Indexed)* 2, 1,5 % US Wind US Earthquake US Multi-peril Multi-peril Multi-region Europe Wind Japan EQ/Wind Cat Bond Market Total 1,,5, Dec Dez Mar Mrz 12 3 Jun Jun 12 3 Sep Sep Dec Dez Mar Mrz 13 3 Jun Jun 13 3 Sep Sep Dec Dez Mar. 21. Mrz 14 * Based on spreads derived from secondary market trades Non-Life ILS Issuance Split Hybrid Parametric Modeled Loss Industry Loss Indemnity % YTD Munich Re ILS Market Update Q1 7

10 Market Factsheet ILS Issuances YTD Transaction Cedant Size ($m) Skyline Re Ltd. Vitality Re V Ltd. Series -1 Class A Cincinnati Insurance Covered Perils Trigger Coverage Structure 1 US Earthquake, Severe Thunderstorm Indemnity Per & Annual Aggregate Pricing (bps) Exp. Loss (%) Issuance MMF January 18, Series Class A Aetna 14 Health Medical Annual MMF January 24, Benefit Aggregate Series Class B 6 MMF Ratio Maturity January 18, 217 January 19, 217 Omamori Re Tokio Millenium 25 US Named Storm, Severe Thunderstorm Indemnity January Queen Street IX Re Ltd. Munich Re 1 US Named Storm, Australia Cyclone PCS/ Modeled Loss Per MMF February 26, June 8, 217 Q1 Gator Re Ltd. East Lane Re VI Ltd. Series -1 Class A Series -1 Class A American Strategic 2 US Named Storm, Severe Thunderstorm Chubb 27 US Named Storm, US Earthquake, Severe Thunderstorm & Winter Storm Indemnity Indemnity Per & Annual Aggregate Per MMF March 1, MMF March 7, January 9, 217 March 14, 218 Kizuna Re II Ltd. Series -1 Class A Series -1 Class B Tokio Marine & Nichido Fire 2 Japan Earthquake Indemnity Per MMF March 14, 45 MMF April 5, 218 Merna Re V Ltd. State Farm 3 US Earthquake Indemnity Per MMF March 31, April 7, 217 Riverfront Re Ltd. General American 95 US Named Storm, US Earthquake, Severe Thunderstorm & Winter Storm Indemnity Per MMF March 31, January 6, Munich Re ILS Market Update Q1

11 Risk Trading Unit Munich Reinsurance Company Königinstrasse München Germany Dr. Andreas Müller Head of Origination, Distribution, ILS Investments Tel.: Dr. Steffen Hinss Manager Origination Tel.: Daniel Stadtmüller Manager Origination Tel.: dstadtmueller@munichre.com Dr. Christian Heigl Chief Actuary Tel.: cheigl@munichre.com Natalie Kraus Manager Origination Tel.: nkraus@munichre.com Dr. Robert Herde Manager Distribution Tel.: rherde@munichre.com Bernd Günther Actuary Tel.: bguenther@munichre.com Sebastian Vogel Actuary Tel.: sevogel@munichre.com Marius Müller Manager ILS Investments Tel.: mmueller@munichre.com Disclaimer Munich Re Group is not a legal, tax or accounting advisor and makes no representations as to the accuracy of any data or information gathered or prepared by Munich Re Group or advisors hereunder. Your company should therefore consult with its own tax, legal or other advisors and make its own independent analysis and investigation of the proposed transaction, as well as the financial, legal, accounting and tax consequences thereof, the creditworthiness of the parties involved and all other matters related to the transaction prior to its own independent decision whether or not to enter into any agreements in connection with the transaction. This analysis and proposal contains indicative terms for discussion purposes only. Munich Re Group gives no assurance that any transaction will be consummated on the basis of these indicative terms and no specific issuer is obliged to issue any security or instrument on such indicative terms. This presentation does not constitute an offer to sell or any solicitation of any offer to buy or sell any security or instrument or to enter into any transaction on such indicative terms. The data and analysis does not assure that securities can be issued at certain terms and conditions. All terms and conditions are subject to a mutually agreed engagement letter. This document is not intended to provide the sole basis for any evaluation by you of a transaction, security or instrument and you agree that the merits or suitability of any such transaction, security or instrument to your particular situation will be independently determined by you including consideration of the legal, tax accounting, regulatory, financial and other related aspects thereof. In particular, Munich Re Group owes no duty to you to exercise any judgement on your behalf as to the merits or suitability of any transaction, security or instrument. The information contained herein is provided to you on a strictly confidential basis and you agree that it may not be copied, reproduced or otherwise distributed by you (other than to your professional advisors) without prior written consent.

12 Münchener Rückversicherungs-Gesellschaft Königinstrasse 17, 882 München, Germany