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Catastrophe bond market back to normal – Higher volumes at lower prices expected in 2010



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    The catastrophe bond market staged a recovery in 2009. With no new bonds being issued at the end of 2008 in the wake of the financial crisis, the market rallied again last year. The volume of new bonds issued came to just under US$ 3.5bn. The sum total thus exceeded the volume of expiring bonds so that overall the outstanding bonds rose marginally to just under US$ 12bn. The spread required by investors also returned to previous levels. For 2010, the volume of new issues is expected to be in the region of US$ 5bn, with interest rates falling slightly.

    “The insurance securitisations sector also learned a few lessons from the financial crisis. Today’s structures are such that investors can now be sure they are really investing only in insurance risks”, said Munich Re Board member Thomas Blunck. “As investor confidence grows and return expectations fall to appropriate levels, catastrophe bonds can again assume their intended role. The capital market is a supplementary risk carrier especially for peak risks for which capacity is in short supply in the traditional insurance market.”

    The key trends in the 2009 market:

    • As a consequence of the Lehman collapse, the spread required by investors had increased significantly as many hedge funds were forced to sell bonds on the secondary market. In the third and fourth quarters, however, risk premiums again sank appreciably.
    • The demand from investors was substantial – a sign of high liquidity as various bonds expired and confidence returned. The composition of investors has clearly shifted towards specialised funds and insurers/reinsurers. At the same time, hedge funds have become less important.
    • The credit and counterparty risk in the collateral funds was minimised after four catastrophe bonds were directly affected following the collapse of Lehman. Many new issues are secured through money market funds and state-guaranteed securities so that investors can again be confident they are primarily taking on an insurance risk that is no longer accompanied by a credit risk they cannot properly assess.
    • By far the largest share of new catastrophe bond issues in 2009 involved US risks: more than four-fifths of the volume issued related to windstorm and earthquake risks in the USA.

    Overall, the prices for catastrophe bonds from the second quarter have reverted to mid-2008 levels. “Prices indicate that the market has recovered,” said Rupert Flatscher, Head of Munich Re’s Risk Trading Unit. “This year will see the expiry of bonds totalling US$ 4.5bn and the proceeds will need to be reinvested. The good performance of the catastrophe bond market also during the financial crisis should ensure an influx of capital of around US$ 1bn into funds specialising in such bonds. In addition, the basic interest shown here by new investors such as pension funds should translate into further growth in the medium term.”

    It is therefore conceivable that for 2010 the volume of new issues may be around US$ 5bn, while the required spread is expected to fall by some 50 basis points up to the middle of the year. It will still be possible to place European risks at lower risk premiums than those for US risks. The development of the PERILS joint venture, which tracks sums insured and insured losses in the industry, thus making it possible to determine market-loss-based triggers for European risks, will favour the placing of European insurance risks on the capital markets.

    “The way the market is developing is highly opportune for Munich Re. In the crisis, we invested heavily in catastrophe bonds on the secondary market. And now, as the market recovers, we can support our clients with new issues, just as we did recently with the Zurich Financial Services Group in structuring and placing Californian earthquake risks,” said Board member Thomas Blunck, who oversees the Risk Trading Unit. “Our strategy of providing an all-round service for risk assumption and risk transfer has clearly paid off.”

    Munich Re stands for exceptional solution-based expertise, consistent risk management, financial stability and client proximity. This is how Munich Re creates value for clients, shareholders and staff. In the financial year 2008, the Group – which pursues an integrated business model consisting of insurance and reinsurance – achieved a profit of €1.5bn on premium income of around €38bn. It operates in all lines of insurance, with around 44,000 employees throughout the world. With premium income of around €22bn from reinsurance alone, it is one of the world's leading reinsurers. Especially when clients seek solutions for complex risks, Munich Re is a much sought-after risk carrier. The primary insurance operations are mainly concentrated in the ERGO Insurance Group. With premium income of over €17bn, ERGO is one of the largest insurance groups in Europe and Germany. It is the market leader in Europe in health and legal expenses insurance. and 40 million clients in over 30 countries place their trust in the services and security it provides. In international healthcare business, Munich Re pools its insurance and reinsurance operations, as well as related services, under the Munich Health brand. Munich Re’s global investments amounting to €175bn are managed by MEAG, which also makes its competence available to private and institutional investors outside the Group.
    This media information contains forward-looking statements that are based on current assumptions and forecasts of the management of Munich Re. Known and unknown risks, uncertainties and other factors could lead to material differences between the forward-looking statements given here and the actual development, in particular the results, financial situation and performance of our Company. The Company assumes no liability to update these forward-looking statements or to make them conform to future events or developments.