Broker Benfield has teamed up with investment bank Merrill Lynch to offer catastrophe bonds and other alternative risk transfer solutions to insurers and reinsurers struggling with capacity shortages, revised rating agency stress tests, and high reinsurance prices for peak exposures.
Rob Bredahl, chief executive of the broker’s corporate finance and advisory business Benfield Advisory and president of Benfield’s U.S. division, will oversee the partnership. He spent 11 years at investment bank Barclays Capital, where he worked his way up to become head of U.S. derivatives sales, before moving to broker EW Blanch, which was later bought by Benfield.
This is not the first time Benfield has joined forces with an investment bank to structure and distribute insurance linked securities. The broker has worked closely with rival bank Goldman Sachs, a market leader in insurance securitisation, before. But Bredahl says Merrill Lynch and Benfield were similarly well positioned to go after a bigger piece of this market, which both wanted but neither had.
“I always thought that teaming up with an investment bank would make sense,” says Bredahl. “Benfield is very good at catastrophe modelling and helping companies structure catastrophe program, but we don’t have a massive global fixed-income infrastructure.”
He adds that the two companies shared the same motives for combining their efforts. “This wasn’t something that made sense to either firm alone because it wasn’t a core business and we couldn’t generate a good return on our own,” says Bredahl. “But we quickly figured out we had the same view of the cat market, the same historical experience, and complementary skills.”
Merrill Lynch was involved in some of the earliest cat bonds, including USAA’s Residential Re program. Merrill Lynch and Benfield also worked together to form and fund class-of-2005 start-up Lancashire Re. Benfield brought private equity investors on board, and Merrill Lynch was the placement agent and corporate financing adviser that helped float the reinsurer.
Moreover, both are partners in collateral management firm Cohen Brothers. Benfield obtains trust preferred and surplus debt from insurers and reinsurers, and places that debt into collateralised pools that are structured and funded by Merrill Lynch.
Bredahl predicts there will be a record number of securitization deals in 2006. This is because of growing demand among issuers and investors’ increased recognition of the benefits of investing in insurance risk, which is not correlated to the other risks in their portfolios. Most of the issuers, he says, will be insurers and reinsurers looking for capacity outside the traditional market because they are unable to get affordable traditional protection.
“There is a big concern in the market that there won’t be enough capacity in the market at any price to satisfy the demand,” he explains. “With that, there is a rapidly growing interest. I’d say almost 100% of the reinsurance companies out there are very interested in issuing insurance linked securities because the retro market is in very bad shape.”
He expects, however, that investors will mainly take an interest in run-of-the-mill catastrophe risks, because the market is still very young. “There will be a lot of personal lines risk, a lot of index-linked covers, and the more plain-vanilla stuff,” he says. “It makes sense for the raw capacity to come in the form of cat bonds, and the difficult, more highly structured, more heavily-underwritten exposures to stay in the traditional reinsurance market.”
