In our latest interview we spoke with William Dubinsky, Managing Director, Willis Capital Markets & Advisory (WCMA). WCMA is the division of global broker Willis Group which focuses on advising insurance and reinsurance companies on mergers & acquisitions, as well as a broad array of capital markets products. WCMA is a growing area of their business and we asked Bill about the ILS space and how WCMA sees their involvement in the market expanding.
You’ve been working in the insurance-linked securities space for some years now. What changes have you noticed (positive and negative)?
Cat bonds have become mainstream. In the early days, companies sometimes sponsored deals more to build the market than for more straightforward business reasons. You can see this change just by looking through the Artemis Deal Directory to see how sponsor press releases have changed over time.
Today, cat bonds have become an ordinary part of doing business for a number of companies. Reinsurance brokers and their clients simply consider ILS as one among several complementary tools along with traditional reinsurance (or retro) to develop and place an efficient integrated reinsurance program.
We continue to have a steady stream of innovation both within cat bonds as well as for other types of ILS, both life and non-life. ILS products beyond cat bonds have not yet had the impact to grow the market as much as some had expected. Still, a lot of ideas that only partially succeeded earlier on can now serve as the building blocks for today’s new products. To create dramatic rather than merely steady incremental growth, these new products may need to play an important role.
One other observation: a lot of people who were involved back in the late ‘90s have changed roles. For example, almost everyone I worked with arranging the Domestic, Inc. deal for Kemper back in 1999 has moved to the buy side.
How do you think the ILS market is fairing currently?
The cat bond market is doing well especially at current spread levels. In the aggregate, cat bond investors have continued cash inflows notwithstanding the reduced spread levels. The sidecar market is on hold pending either an event catalyst or the return of easy leverage.
Outside of the cat space (not counting extreme mortality bonds which are essentially cat bonds), we see opportunity but less activity. On the life side, embedded value deals may start to return in the current spread environment. XXX statutory strain deals seem comfortable in the bank market for now without direct securitization support. The longevity risk transfer market seems primed for expansion and ILS could play a role. Whether the recent Kortis deal for Swiss Re is part of the way forward is unclear.
Can you explain a little about the work that the team does there?
WCMA is a premier insurance-focused investment bank engaged in both strategic advisory work and capital raising. WCMA’s CEO Tony Ursano leads an experienced team that has arranged a large number of notable transactions over the years. For example, WCMA represented Harbor Point in their merger with Max Capital Group that resulted in the formation of Alterra.
WCMA has a full service ILS effort. We have an experienced team in London and New York that works with insurers, reinsurers, as well as insured entities worldwide to evaluate and implement a broad range of ILS and related solutions. Besides cat bonds, extreme mortality bonds, life ILS, sidecars and contingent capital, we work to bring new products to the market.
We have a secondary trading effort handled by Howard Bruch. This facilitates investor liquidity and helps us stay close to investor sentiment. In addition, our U.S. securities broker-dealer is fully licensed to play all necessary roles on ILS transactions including acting as initial purchaser and sole-manager of a Rule 144A cat bond or privately-placed sidecar.
When we work with insurers and reinsurers that use Willis Re, we work very closely with the broker team to integrate the ILS solution with other products to meet the client’s needs. This is truly a team effort; more than just talking to the brokers and clients. We access the firm’s analytics resources in cat modelling, actuarial analysis, and rating agency advisory. Where appropriate, we can work with reinsurers to deliver complementary products to an ILS transaction such as bridge covers, reinsurance to close etc.
Do you focus on ILS instruments alone or does WCMA have a focus on ILWs and other instruments?
Along with the WCMA capital raising efforts and our cooperation with Willis Re we get involved in a host of ILS-related products including contingent capital and insurance derivatives. We work very closely with Willis Re in both ILWs and exchange-traded contracts as these products are related to ILS for both sponsors and many of the investors.
Willis is a large global organisation with many divisions. How does the Willis Capital Markets & Advisory team fit within the organisation structure? Are you originating business for other areas at Willis or are other areas originating business for you?
On a formal organization chart we are separate from the brokerage businesses including Willis Re. Tony Ursano reports indirectly to our CEO, Joe Plumeri. On origination Willis works cooperatively to meet the needs of our clients. We originate some business on our own and some in tandem with Willis Re and other parts of the firm. In addition, WCMA sometimes works with other parts of Willis to originate business for them.
Are you working with investors as well as insurers and reinsurers?
Yes. We have regular investor dialogue because of our WCMA trading effort in ILS. We also benefit indirectly from the broader Willis dialogue in other products with many of these same entities (e.g., Willis Re’s ILW and collateralized reinsurance discussions with the same entities when they act as reinsurers rather than as investors). We also speak with a broader group of investors, many of whom are potential investors in sidecars or equity investors in new and growing (re)insurers. This positions us well for new issue distribution of ILS as well as sidecars.
Some investors engage in combination transactions and Willis can help. For example, we can help them buy a cat bond and then Willis Re can help them partially hedge the bond with an ILW.
How do you see the investor landscape changing as the cat bond and ILS markets mature?
You really have three areas:
- Cat bonds and related solutions including extreme mortality bonds
- XXX and embedded value life ILS
- Everything else
Focusing only on cat bonds, we see a relatively mature and stable group of investors that changes emphasis through both the insurance and credit cycles. At this point, dedicated funds have become very important but the pendulum could shift back to more generalist investors in search of relative value.
Some would like to see more direct investment from pension funds, life insurers, and endowments in cat bonds and that would certainly grow the market. However, these types of investors focus on investment grade risk for their direct investment and are more comfortable accessing non-investment grade risk by backing dedicated funds at the moment. Most nonlife sponsors see little value in investment grade protection at current pricing.
Where do you see innovation coming from in the ILS space? Any thoughts on new lines of business we could see issued in future?
Any dramatic growth in ILS will likely occur beyond cat bonds. Cat bonds themselves may take a larger portion of a growing catastrophe reinsurance market but this on its own will result in only incremental growth. Outside of cat bonds, obviously life ILS has some potential for substantial growth. Some of the dedicated investors have added more analytic resources recently on the life side to support this. Various forms of casualty ILS might also become important.
Depending on the structure, banks, ILS investors, convertible investors, or equity investors can all play a role to provide insurance companies with contingent capital. With the activity in Europe around Solvency II and the new banking regulation, we could see a refocus on refining these products to place them in the ILS market to reach a different group of investors.
On the cat side, the recent events in Australia highlighted the need for better management of flood risk by policy holders, insurers, reinsurers, and government entities. In the US, the NFIP may change in a way allowing for more private involvement. Cat bond capacity could prove helpful in absorbing a considerable amount of new nat cat risk.
Can you foresee any threats or do you have any fears for the markets future?
Nothing keeps me awake at night. Still, I do struggle with one question: are ILS investments suitable for retail investors? Some market participants push for this from time to time. For now, an institutional focus with retail investors participating indirectly through managers seems to makes sense.
Perhaps, you could structure something with sufficient transparency for retail investors, at least for cat bonds or extreme mortality bonds. On the other hand, if you compare the transparency in ILS to the general level of transparency in the retail-oriented municipal bond market or in some corners of the public equity market, maybe ILS is a suitable retail investment.
Do you have any thoughts on how regulation, particularly Solvency II and Dodd-Frank could impact the ILS market?
The combination of Solvency II, pending changes to IFRS and US GAAP rules, and US regulatory uncertainty (e.g., implementation of Dodd-Frank) have frustrated ILS new product development in the past few years. As these issues go away, frustration may turn to opportunity.
In particular, we will see opportunity from Solvency II. It will change the way insurers and reinsurers manage their risks. To the extent companies have internal capital models approved for use under Solvency II, we may see some pretty innovative products to address the needs identified by those models.
Dodd-Frank so far seems like a non-issue for the core cat bond market but the impact of Dodd-Frank on other areas, including the exchange-traded market remains unclear. The new Federal Insurance Office in Treasury could actually prove quite helpful in supporting the market.
Do you have any predictions or insight on what 2011 will bring for the ILS market?
2011 may resemble 2007 with capital markets participation in catastrophe risk increasing over 2010. If a large event occurs in 2011, sidecar capacity may respond even more rapidly than in the past. Finally, the 2010 life ILS deals could portend more of the same in 2011 along with the return and expansion of ILS to other perils.
Our thanks go to Bill for his time and insight into the market and the work of Willis Capital Markets & Advisory.Disclaimer:
Willis Capital Markets & Advisory (WCMA) is a marketing name used by Willis Securities, Inc. (WSI), a licensed broker dealer registered with the U.S. Securities and Exchange Commission and member of FINRA and SIPC, and Willis Structured Financial Solutions Limited (WSFSL), an investment business authorized and regulated by the UK Financial Services Authority. Both WSI and WSFSL are Willis Group (Willis) companies. Willis is a global insurance broker and provides insurance brokerage and risk management services to clients around the world. Securities products are offered in the U.S. through WSI and in the U.K. through WSFSL. Nothing in this communication constitutes any legal or financial advice or an offer or solicitation to sell or purchase any securities.