More details on Munich Re’s plans to launch an ILS & catastrophe bond fund

Yesterday we revealed the news that the world’s largest reinsurer, Germany headquartered Munich Re, was working on plans to launch an insurance-linked securities and catastrophe bond fund. The story generated a lot of interest, becoming the most viewed of the day, and as details were scant we reached out to Munich Re to request some more information for our readers. Dr. Andreas Müller, head of Origination/Distribution/ILS Investments in the Munich Re Risk Trading Unit, kindly provided some insight.

First we asked Dr Müller why Munich Re would launch an ILS fund?

Obviously there is significant interest, we have also been approached by several potential investors asking whether Munich Re would be willing to assess ILS within an advisory mandate. This showed to us that potential investors would rely on Munich Re’s expertise when it comes to investing in ILS. Since the assessment of the underlying insurance risk is the decisive part within the ILS investment process – and we have this expertise in-house anyhow – it makes absolute sense for us to provide the whole fund product. As we have been running and continuously expanding our proprietary ILS portfolio for more than 5 years, expanding this service to other investors is just the next logical step forward.

Next we asked what opportunity Dr Müller felt launching an ILS fund could give to Munich Re?

From our core business we can easily transfer the necessary knowhow and systems in place to assess the underlying risk in an ILS structure and, as mentioned, we have been running a proprietary fund for years now. This brings us in a position where we can leverage existing know how and infrastructure to generate fee income with resources already at hand and open up new long-term resources of capital to increase capacity for peak perils/risks the market needs. We also aim at further educating investors and developing sustainable/long-term investors such as pension funds and of course to strengthen these relationships. Long-term real money investors would expect a high reputation provider working out of a fully regulated environment and base investment decisions on material underwriting capacity. Our ability to deliver on exactly those factors minimizing career risk for major interested players is setting us apart and provides Munich Re with the opportunity to team up with major capital sources in the alternative market which is bound to increase its importance over the next years.

We asked whether Munich Re would manage such a fund in-house or look to partner, or create a joint-venture, with an investment manager?

For the preparatory work done so far, i.e. funds structure, pre-marketing etc., we teamed up with a partner. How the final set up may look like is not yet decided. However, there is of course a certain probability that we may join up with a partner like an investment manager with a strong distribution network. Our value to potential institutional investors is access to our underwriting excellence. For that reason, we could consider a joint venture with an alternative funds manager.

We asked whether Munich Re would invest in catastrophe bonds and ILS alone, or include ILW, collateralized reinsurance, financial insurance contracts etc?

Currently we focus on an ILS-only funds as we want to offer a very transparent and straightforward funds product to investors. We believe that this is key given the investor base we are targeting and the first feedback we received so far from potential investors confirms this. However, we don’t rule out that we may open this fund to other instruments such as ILWs in the future.

Finally we asked Dr. Müller for any other insight he could share with us on the plans and perhaps the timeline?

We are in discussions with some potential clients, but it is too early to fix a timeline. Our aim is to attract long term capital and hence we aim at this first. Munich Re’s proprietary fund and the new 3rd party fund would of course be separated from each other to ensure that the new fund can develop a track record of its own. Nonetheless, Munich Re would keep a certain co-share in the 3rd party fund for alignment of interest purposes.

So it seems that Munich Re are relatively far down the line in making preparations to launch this new ILS fund. We will of course bring you more details as it becomes available and Munich Re push their fund towards a launch date. Our thanks go to Dr. Andreas Müller for providing us with his time and insight into Munich Re’s plans.