Munich Re’s Eden Re II sidecar downsized to $190m for 2022

Global reinsurance giant Munich Re has now completed its annual two tranche of note renewal of its Eden Re II Ltd. fully collateralised reinsurance sidecar vehicle for 2022, with the issuance smaller than prior years at $190 million.

In December, we reported that Munich Re had completed the first part of its annual Eden Re II reinsurance sidecar renewal, as a $42.1 million tranche of Series 2022-1 Class A notes became the first to complete.

Now, Munich Re has added a second tranche, as is typical of its sidecar renewals in recent years, with a $147.9 million tranche of Series 2022-1 Class B notes.

Both tranches are smaller than recent years and overall, at $190 million, this is the smallest annual renewal of an Eden Re reinsurance sidecar for Munich Re for quite a few years.

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

Munich Re has been tapping the capital markets for fully-collateralised retrocessional catastrophe reinsurance with an Eden Re sidecar vehicle since 2014.

In January 2014 we covered a $63 million issuance from the Eden Re Ltd. sidecar for Munich Re, which was then followed at the end of that year by a $75 million Eden Re sidecar issuance for 2015.

The first Eden Re II Ltd. sidecar issuance was for the 2016 underwriting year, with a $360 million transaction coming to light.

The, for 2017, Munich Re’s sidecar issues went to a two tranche structure, with again roughly $360 million of notes issued by Eden Re II.

For 2018, the Eden Re II sidecar shrank to $300 million in size and then for 2019 it was renewed at around the same size.

2020 saw Munich Re’s Eden Re II reinsurance sidecar shrink to $285 million across the two tranches of notes issued and then last year, for the 2021 underwriting year, the Eden Re II sidecar issuances shrank to a combined $235 million.

Now, for 2022, at $190 million, this is the smallest Eden Re collateralized reinsurance sidecar issuance for Munich Re since 2015.

The shrinking implies some challenges in securing collateralized quota share capacity in the same volumes, which is a trend that has been documented widely as some insurance-linked securities (ILS) investors and ILS fund managers have shied away from sidecar deals in recent years.

But it also likely reflects Munich Re’s changing strategy, with how much catastrophe risk it wants to retain as well as how it utilises retrocessional sources of reinsurance capital within its business.

In fact, as the Eden Re sidecar issuances began to shrink, inward property catastrophe reinsurance rates earned by Munich Re for its underwriting have been on the rise, so we do suspect that the reinsurer is retaining more risk generally these days given the compounding of renewal rate increases.

While global reinsurers, like Munich Re, will leverage their sidecars to help them expand their books, while controlling their exposures, in certain market conditions.

When conditions improve and it’s more attractive to retain business, while the cost of third-party reinsurance capital increases, it is no surprise to see the structures downsize as well.

So there are likely two drivers for the shrinking, both appetite of investors and Munich Re’s evolving risk appetite in a multi-year firming catastrophe reinsurance market.

Munich Re also has its private sidecar arrangement with pension investor PGGM through Leo Re Ltd. and this and Eden Re II remain an important feature of its retrocessional arrangements, allowing it to share the risks and returns of its underwriting with third-party investors and earn some fee income in the process.

For the second tranche of 2022, Munich Re’s Bermuda domiciled special purpose insurer (SPI) Eden Re II Ltd. has issued $147.9 million of Series 2022-1 Class B participating notes, which are due for maturity as of March 20th 2026.

That’s aligned with the maturity date of the $42.1 million of Series 2022-1 Class A participating notes issued in December.

Both tranches of notes were issued on behalf of a 2022-1 segregated account of Eden Re II Ltd. and were sold to qualified institutional investors.

The collateral raised will now be used to support a retrocessional reinsurance agreement, which we expect will be a property catastrophe quota share, between Munich Re and Eden Re II.

As we explained before, sources have been telling us that that investors are increasingly demanding in sidecar renewal negotiations and this was the case again for 2022, as improved terms on buffer clauses and more transparency around the potential for collateral to be held are again sought.

As Munich Re is one of the largest reinsurers in the world, it is extremely well equipped to provide its sidecar investors with rich information on its losses, to ensure they are kept informed as the risk period for the sidecar notes progresses.

While they can upszie and downsize the vehicles, global reinsurers, such as Munich Re, continue to rely on the capital markets and their collateralised reinsurance sidecars to source efficient capital to support their underwriting.

Quota share arrangements provide capital in an efficient manner to support growth and also moderate PML’s, while providing attractive fee income opportunities and enabling the reinsurer to better manage its exposures, particularly in property catastrophe risks, with investors sharing in the risks and returns of its portfolio with capital market investors.

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