Insight and Intelligence on the London & International Insurance Markets 17 Mar 2018

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Confident Munich Re continues with EUR1bn debt buyback

  • 21 March 2011
  • Munich Re gave a strong signal last week that its Japanese exposures will not alarm investors after affirming its determination to buy back a targeted EUR1bn of outstanding debt from bondholders.

    The German reinsurer initially announced its plans on 10 March - a day before the Japan quake - to buy back up around EUR1bn of its EUR3bn of debt yielding 6.75 percent and redeemable in 2023.

    Managed by Citibank, Commerzbank and Goldman Sachs, Munich Re could have cancelled this tender offer if it felt the Japan loss would put too much pressure on its capital base.

    But on the 16 March, the world's largest reinsurer reiterated its decision and extended the offer deadline to 23 March "due to the volatility of the international capital markets resulting from the earthquake and tsunami in Japan".

    Morgan Stanley analyst Marcus Rivaldi commented: "We do not believe a group as traditionally conservative as Munich Re would continue on this path if it had any capital concerns as a result of earthquake losses and ahead of the North Atlantic hurricane season."

    Munich Re's one-in-200 year modelled loss exposure to Japan is EUR1.5bn after tax and retro recoveries, the equivalent of 8 percent of its core year-end equity of EUR17.8bn or 62 percent of its 2010 EUR2.4bn income.

    The reinsurer has yet to make a public loss estimate but today (21 March) its rival Swiss Re posted a preliminary estimate of $1.2bn (EUR850mn). Last week, meanwhile, Scor reassured shareholders by saying its worst-case exposures would be EUR185mn.

    The price of Munich Re's tradable debt - like that of its peers - initially fell last week as the scale of the devastation in Japan became apparent, before stabilising and even improving towards the end of the week.

    Overall, European reinsurers' bond prices typically fell by around 3 percent last week before trading up towards the end of the week, as concerns over solvency from the event reduced, though not enough to entirely erase losses from earlier in the week.

    Similar movements were experienced in subordinated credit default swaps for the major reinsurers, which typically widened by around 20 basis points before tightening back in by around 10 basis points at the end of the week.

    "We expect the cost for European insurers will be manageable based upon current information," Rivaldi commented.

    "We believe the domestic Japanese insurance sector, the Japan Earthquake Reinsurance Company and Japanese state will shoulder most of the insured loss."

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