Deutsche Setting Up Insurance-Linked Fund
Deutsche Bank is in the early stages of setting up a hedge fund that would absorb risk from insurance companies, in part by purchasing catastrophe bonds.
While the bank has yet to launch the vehicle or begin marketing it to investors, the early word is that it aims to seed the entity with $100 million of its own money — an amount that suggests the institution sees an attractive opportunity for growth in an area where it hasn’t been an active fund manager in the past.
The fund would be run by a London-based team within the Deutsche Asset & Wealth Management unit. Leading the initiative will be Michael Amori, who recently came back on board after leaving another area of Deutsche late last year to focus on academic pursuits.
During his first stint at Deutsche, Amori co-headed a “longevity markets” group within the bank’s corporate-banking and securities division. That role saw him arrange swaps designed to allow corporate pension managers to shed the risk that their beneficiaries would live longer than projected. Among his deals: a £3 billion ($4.6 billion) swap with Rolls-Royce Pension Fund in 2011 and a €12 billion ($15.7 billion) swap with Aegon in 2012.
Funds like the one Deutsche is planning typically deal in less-exotic fare. Take catastrophe bonds, which are among their most common investments. Those instruments essentially act as short-term reinsurance products, allowing insurers to offload some of the risk that they would face major payouts if a natural disaster strikes a specific location during a given window of time — say, a hurricane in Florida or an earthquake in Japan. That task is accomplished by arranging for buyers of the bonds to absorb a layer of losses should such an event occur.
Catastrophe-bond investors, meanwhile, typically seek to minimize risk by diversifying their exposures across different regions and types of disasters. Hedge funds increasingly have been venturing into the area. So too have institutional investors, with many viewing the market as a low-volatility fixed-income play with virtually no correlation to other asset classes. They’ve been buying the bonds directly and handing capital to fund managers — with some going so far as to create insurance-linked investment allocations.
Issuers have responded with a growing supply of cat-bond offerings. For example, the past two months alone have seen deals completed by Allianz, Allstate, American Coastal Insurance, Munich Re, Turkish Catastrophe Insurance Pool and USAA, according to sister publication Asset-Backed Alert.
The largest operators of hedge funds that invest in insurance-linked securities are Credit Suisse, with $4 billion to $5 billion at work in the sector; Fermat Capital, which runs about $4 billion; and the $8 billion Nephila Advisors, which sold a minority stake in its business to Kohlberg Kravis Roberts in January. Napier Park Global Capital, which spun off from Citigroup this year, also is planning the launch of an insurance-focused vehicle.
As for Deutsche, it’s unclear how the bank plans to reconcile its support of the planned fund with limitations on such investments under the Dodd-Frank Act’s Volcker Rule. As proposed, a bank would be allowed to seed the launch of a hedge fund but could account for no more than 3% of the vehicle’s capital starting a year after its launch. Many banks also have been pulling back from launching their own funds in response to higher Tier 1 capital requirements set by the Bank for International Settlements’ Basel 3 rule. However, the word is that Deutsche plans to move ahead with the effort anyway.