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Benfield bonds with Merrill Lynch over catastrophe capital

The post-Katrina love affair between the capital markets and reinsurance continues to blossom with news that Benfield Group is collaborating with Merrill Lynch to provide a catastrophe bond scheme for reinsurance buyers.

Catastrophe bonds, together with other forms of contingent capital such as sidecar retrocessional vehicles, have grown in popularity following last year's devastating losses from hurricanes Katrina, Rita and Wilma. Capital market investors are attracted to the potential high returns which are uncorrelated to traditional investment assets, while reinsurers are burdened with additional capital requirements following their heavy losses and the subsequent readjustments made by the rating agencies and modelling companies.

In an announcement today (20 April), Benfield said it has formed a relationship with the investment bank to offer catastrophe bonds as a form of alternative capital for peak risk exposures.

"Following two successive years of record catastrophe losses, many insurers and reinsurers are now exploring alternatives to traditional sources of capacity to protect themselves against losses from natural catastrophes. As a reinsurance intermediary, we are committed to being able to offer our customers the widest possible range of solutions to their risk management needs and this agreement with Merrill Lynch further extends our ability to provide contingent capital outside the conventional reinsurance market," explained Benfield's chief executive Grahame Chilton.

Noting the growing enthusiasm for the capital markets - and in particular hedge funds - to have exposure to reinsurance investment products, Benfield's Rob Bredahl explained: "Cat bonds provide an excellent platform for a broader range of investors because they are rated securities that lend themselves to quantitative analysis for a more transparent evaluation of risk and reward. Investors have become more comfortable with investing in insurance-linked securities over the past several years as the structure of these securities has evolved, and investors have recognised the benefits of such non-correlated assets."

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