Insurance-Linked Securities (ILS) Market Update Q1 2014

Insurance-Linked Securities (ILS)
Market Update Q1 2014
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 2014
10.00 a.m.–11.00 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:
www.munichre.com/rtu
Market Review
Outstanding capacity provided by cat bonds shrinks due to overhang
of maturities
After growing by more than $3.5bn in 2013 due to continued capital inflows, the ILS
market has lost some momentum during the first quarter of 2014, 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 2013 to preemptively renew cat bonds maturing in Q1 2014. As a result, the
market’s total size in terms of outstanding capacity decreased from $19.1bn at the end
of 2013 to $18.6bn on March 31, 2014.
ILS Market In- and Outflows ($m)*
1,876
19,147
2,072
1,535
1,449
2,998
1,031
15,620
18,610
614
346
2,540
285
Outstanding
Maturities
Issuances
Year-end
2012
Q1 2013
Q2 2013
Q3 2013
Q4 2013
Year-end
2013
Q1 2014
2014
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 2014, 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 2014
1
Market Review
Placement environment with upsized transactions and pricing below
initial guidance persists through first quarter of 2014
The ongoing inflow of capital in 2013 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 2014 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 2014 YTD
800
700
600
500
400
100
2
Munich Re ILS Market Update Q1 2014
Riverfront Re
Merna Re V
Kizuna Re II Class B
Kizuna Re II Class A
Gator Re
East Lane Re VI
0
Vitality Re V Class A
High (bps)
Initial Spread Guidance –
Low (bps)
Final Risk Spread (bps)
200
Queen Street IX Re
Issuance Volume ($m)
Initial Spread Guidance –
300
Vitality Re V Class B
Initial Volume Guidance ($m)
Market Review
Despite the downturn in overall outstanding capacity due to an excess of maturities, Q1
2014 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 $1,493m in 2012.
Q1 ILS Issuance Volume ($m)*
1,800
1,600
1,535
1,493
1,400
1,200
1,015
1,000
800
600
Final Issuance Volume
661
650
550 575
400
Initial Volume Guidance
1,245
1,163
350
731
400
200
0
2009
2010
2011
2012
2013
2014
* 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 2014
3
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 2014 should therefore lie north of $2bn. Looking
ahead to year-end 2014 we expect several issuances from mainly US insurers, as the
bulk of maturities in the first quarter of 2015 are scheduled for the beginning of January
and many sponsors will attempt to lock in their protection prior to the corresponding
maturity.
Upcoming Cat Bond Maturities ($m)*
Expected loss (%)
6
6
5
5
4
4
3
3
2
2
1
1
0
0
Q2 2014
Q3 2014
Q4 2014
Q1 2015
Q2 2015
US Wind
430
US Earthquake
150
US Multi-peril
1,970
Multi-peril/-region123
Europe Wind
347
Japan Earthquake
300
Health150
Total
3,470
US Wind
400
US Multi-peril
250
Multi-peril/-region765
Europe Wind
67
US Wind
1,184
Multi-peril/-region229
US Earthquake
Europe Wind
Japan Wind
150
150
160
US Earthquake
200
Multi-peril/-region150
Total1,413
Total
460
Total
US Multi-peril
Health
Multi-peril Multi-region
Europe Wind
US Wind
US Earthquake
350
Japan EQ/Wind
* 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 2014
Total
1,482
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 100-year return period.
Cat Bond Pricing Forecast*
Risk spread (bps)
1,000
900
800
700
600
500
400
US Wind
300
US Earthquake
200
Japan EQ/Wind
Europe Wind
Other Non-US
100
0
0
0,5
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 2010–2012, 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 2015, 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 2014
5
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 a
ppetite for unrated cat bonds, including Munich Re with its latest Queen
Street and Queen City transactions. As a result, 67% of total issuance in 2014 YTD has
come from unrated transactions. We expect sponsors to continue pushing for improved
cost structures during 2015, with potential implications for fee levels of cat bond service providers.
Rated vs. Unrated Cat Bond Issuances
%
100
90
80
70
60
50
40
30
S&P
20
Moody’s
10
Unrated
0
2008
2009
2010
2011
2012
2013
2014 YTD
* Excluding Mortality transactions; cat bonds with Euro-denomination were converted into $-amounts using the
exchange rate on the respective day of issuance
6
Munich Re ILS Market Update Q1 2014
Market Factsheet
Cat Bond Risk Spreads (Indexed)*
%
200
2,0
180
160
140
1,5
120
100
29. Jun 12
28. Sep 12
31. Dez 12
29. Mrz 13
28. Jun 13
30. Sep 13
27. Dez 13
31 Mar. 2014
30. Mrz 12
31 Dec. 2013
31. Dez 11
30 Sep. 2013
0
0,0
30 Jun. 2013
Cat Bond Market Total
20
31 Mar. 2013
Japan EQ/Wind
40
0,5
31 Dec. 2012
Europe Wind
30 Sep. 2012
Multi-peril Multi-region
60
30 Jun. 2012
US Multi-peril
80
31 Mar. 2012
US Earthquake
31 Dec. 2011
US Wind
1,0
21. Mrz 14
* Based on spreads derived from secondary market trades
Non-Life ILS Issuance Split
%
100
90
80
70
60
Hybrid
Parametric
50
40
30
Modeled Loss
20
Industry Loss
10
Indemnity
0
2009
2010
2011
2012
2013
2014 YTD
Munich Re ILS Market Update Q1 2014
7
Market Factsheet
ILS Issuances 2014 YTD
Q1 2014
Transaction
Size
($m)
Covered Perils
Trigger
Coverage
Structure
Pricing (bps)
Exp.
Loss
(%)
Issuance
Maturity
Skyline Re
Ltd. 2014
Series 2014-1
Class A
Cincinnati
Insurance
100
US Earthquake,
Severe Thunderstorm
Indemnity
Per
Occurrence
& Annual
Aggregate
MMF + 1400
-
January 18,
2014
January 18,
2017
Vitality Re
V Ltd.
Series 2014 Class A
Aetna
140
Health
Medical
Benefit
Ratio
Annual
Aggregate
MMF + 175
0.01
MMF + 250
0.21
January 24,
2014
January 19,
2017
Series 2014 Class B
60
Omamori Re
Tokio
Millenium
25
US Named Storm,
Severe Thunderstorm
Indemnity
–
–
–
January
2014
–
Queen Street IX Re Ltd.
Munich Re
100
US Named Storm,
Australia Cyclone
PCS/
Modeled
Loss
Per
Occurrence
MMF + 550
2.92
February 26,
2014
June 8, 2017
Gator Re
Ltd.
Series 2014-1
Class A
American
Strategic
200
US Named Storm,
Severe Thunderstorm
Indemnity
Per
Occurrence
& Annual
Aggregate
MMF + 650
1.12
March 10,
2014
January 9,
2017
East Lane
Re VI Ltd.
Series 2014-1
Class A
Chubb
270
US Named Storm,
US Earthquake,
Severe Thunderstorm & Winter
Storm
Indemnity
Per
Occurrence
MMF + 275
0.89
March 7,
2014
March 14,
2018
Kizuna Re
II Ltd.
Series 2014-1
Class A
Tokio
Marine &
Nichido
Fire
200
Japan Earthquake
Indemnity
Per
Occurrence
MMF + 225
0.37
March 14,
2014
April 5, 2018
MMF + 250
0.78
Merna Re V Ltd.
State Farm
300
US Earthquake
Indemnity
Per
Occurrence
MMF + 200
0.4
March 31,
2014
April 7, 2017
Riverfront Re Ltd.
General
American
95
US Named Storm,
US Earthquake,
Severe Thunderstorm & Winter
Storm
Indemnity
Per
Occurrence
MMF + 400
1.34
March 31,
2014
January 6,
2017
Series 2014-1
Class B
8
Cedant
Munich Re ILS Market Update Q1 2014
45
Risk Trading Unit
Munich Reinsurance Company
Königinstrasse 107
80802 München
Germany
Dr. Andreas Müller
Head of Origination, Distribution,
ILS Investments
Tel.: +49 89 38 91-92 94
[email protected]
Dr. Steffen Hinss
Manager Origination
Tel.: +49 89 38 91-49 19
[email protected]
Daniel Stadtmüller
Manager Origination
Tel.: +49 89 38 91-47 03
[email protected]
Dr. Christian Heigl
Chief Actuary
Tel.: +49 89 38 91-95 19
[email protected]
Natalie Kraus
Manager Origination
Tel.: +49 89 38 91-94 97
[email protected]
Dr. Robert Herde
Manager Distribution
Tel.: +49 89 38 91-51 19
[email protected]
Bernd Günther
Actuary
Tel.: +49 89 38 91-52 24
[email protected]
Sebastian Vogel
Actuary
Tel.: +49 89 38 91-29 83
[email protected]
Marius Müller
Manager ILS Investments
Tel.: +49 89 38 91-35 64
[email protected]
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 advis
ors 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
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may not be copied, reproduced or otherwise
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© 2014
Münchener Rückversicherungs-Gesellschaft
Königinstrasse 107, 80802 München, Germany