27 May 2002
Press Release
Munich Re strengthens its profile in the market for alternative risk transfer
(ART) / Formation of Munich-American Capital Markets
The Munich Re Group is merging the ART units of Munich Re, Munich, and American
Reinsurance Corporation, Princeton, in its newly formed entity Munich-American
Capital Markets (MACM). It is thus strengthening its position in alternative
markets business, responding to the growing demand for structured reinsurance
and capital market solutions.
Through structured reinsurance and capital market solutions, reinsurers can
take account of the special needs of their clients in times of complex risk
exposures that are increasingly difficult to handle. Such solutions are especially
interesting where conventional approaches alone no longer suffice to properly
protect cash flow, earnings or balance sheets against unexpected occurrences.
The merger of the units to form MACM will enable the Munich Re Group to concentrate
its existing know-how and generate synergies for optimizing earnings. The new
company will bring the Group nearer to its objective of also being the world's
leading provider of financial services in the area of ART solutions.
MACM is now the centre of competence within the Munich Re Group for the acquisition,
structuring (i.e. the processing of risks for the capital market) and realization
of innovative capital-market solutions. For transactions in the form of financing
contracts, MACM will use its own capital. For (re)insurance contracts, it will
be backed by the Munich Re Group's capacity.
MACM will be headquartered in New York, but will operate within the Special
and Financial Risks Division of Munich Re, Munich. The company will be headed
by Kenneth J. Bock as Managing Director. Munich Re Board Member Clement Booth,
whose responsibilities include the Special and Financial Risks Division, is
Chairman of the Board of Directors.
The aim of ART is to create a synthesis between financial and insurance transactions.
Solutions available in the field of ART for the management of complex risks
are many and varied. They deviate from the conventional transfer of risks in
the financial or insurance sector insofar as risks in ART are exchanged between
the insurance and capital markets using the tools and techniques familiar in
each.
MACM sees its strategic positioning as especially geared to business potential
in the transfer of risks from the capital market to the insurance market. Examples
are structured credit solutions, in which banks transfer credit risks to the
insurance market with the aim of optimizing their capital base, or weather derivatives,
which allow the policyholder to take out cover against unfavourable weather
conditions. Thus, for example, the operator of a ski-station can cover himself
against a lack of snow, or the operator of a wind power station against too
little wind. A further variant is the simultaneous coverage of risks that are
to be found on both the assets and the liabilities side of a company's
balance sheet. Using an "integrated risk management solution", it
is possible, for instance, to offer protection against losses caused by a natural
event (liabilities side) coinciding with a fall in prices on the stock exchange
(assets side).
The best-known example of ART among the public, though, is the transfer of
insurance risks to the capital market in the form of bonds or derivatives. This
form of risk transfer enables (re)insurers to access the capital market as an
additional source of capacity to supplement traditional (re)insurance. The capital
provided upfront by the financial market investor acts as a liability fund which
covers the insured against the occurrence of a specified event that triggers
liability. MACM sees less potential in this area, since it is more economical
in the current environment for the insured to procure capacity on the traditional
(re)insurance market. Two of the reasons for this are the high premiums and
transaction costs incurred in risk transfer to the capital market.
The Munich Re Group has been an active player in the ART market for some years
now, operating in strict conformity with the applicable legal, fiscal and regulatory
requirements. Its best-known transactions include the catastrophe bonds sponsored
by Munich Re, Munich (PRIME Capital) and American Re (Gold Eagle), so-called
"cat bonds" transferring natural catastrophe risks to the capital
market.