4 July 2014 Alternative Risk Transfer

Munich Re ILS flop not indicative of wider demand

The decision by Munich Re to pull the plug on its recent catastrophe bond Queen Street X Re is not indicative of any wider uncertainty in the insurance-linked securities (ILS) markets with investor demand still robust at the right price.

That is the consensus among market practitioners commenting on the recent decision by the world’s largest reinsurer to scrap its latest catastrophe bond issuance.

Munich Re was trying to sell a bond reportedly worth around $100 million seeking retrocessional protection from US hurricanes and Australian cyclones.

It was apparently disappointed by investor interest in the deal at the pricing it was seeking. An announcement from the bookrunners said 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.

Investors say that Munich Re simply pushed too far on the price. John Seo, co-founder and managing principal at investment fund Fermat Capital, plays down the implications of this deal for the wider market. “Investor appetite is completely unchanged. The sponsor just pushed things too far on price,” he said.

Mike Millette, global head of the structured finance group at Goldman Sachs, agrees, adding that the market is starting to reach a balance in terms of pricing.

“Appetite is very strong, but not at any price,” said Millette. “Investors are demonstrating robust demand but are also showing signs that the long tightening run in pricing is slowing. The market seems balanced around current price levels. We will need to see how the June/July traditional market renewals progress I think before we see additional movement.”

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