Colin Reddy, md, head of financial institutions and advisory at Howden CAP, answers SCI's questions

Q: You joined Howden CAP in April from Mizuho, where you executed a number of strategic capital and balance sheet transactions for the firm’s clients (SCI 12 April). What attracted you to move to the insurance side of the risk transfer market?
A: I began my career in insurance, but I have spent the last 20 years in banking working in various roles across asset management, treasury and capital markets, including establishing Bank of Ireland’s significant risk transfer programme and leading Mizuho’s SRT efforts. There are a couple of aspects that attracted me to return to insurance: the dynamic nature of the insurance market, which allows different solutions to be created across many risk categories, and the continued potential for growth.

The level of credit risk on insurers’ balance sheets only makes up a small proportion of their liabilities - especially when compared to credit risk on a bank’s balance sheet - which means there are significant opportunities for them to partner with banks, as banks seek to optimise their balance sheets. Ultimately, banks want to diversify the partners they work with and the ways they distribute risk.

Q: Howden CAP is seeking to leverage the power of insurance to develop balance sheet optimisation solutions for its clients. What makes the business unique in the risk transfer space?
A: The Howden story itself was also an attraction for me. The firm has seen huge growth over the last few years and its entrepreneurial spirit feeds into the CAP strategy.

There is a willingness to invest in opportunities and allow time for those opportunities to have successful outcomes. ‘CAP’ stands for ‘capital advisory and placement’ and is made up of five key pillars: credit & political risk, tax & contingent risk, M&A, surety and climate and transition risks.

The firm has focused on bringing in industry experts from the banking, legal, asset management and consultancy fields across each of the pillars. When combined with the depth of our insurance specialisms, this creates the ability to advise on balance sheet optimisation across a wide range of clients – whether they are corporates, private banks, development banks, asset managers or private equity firms – as well as structure and place solutions for them. These unique synergies allow us to better identify opportunities to serve our clients.

Q: What kind of solutions is Howden CAP seeking to provide in the balance sheet optimisation/risk transfer space?
A: Howden CAP is focused on providing a range of innovative solutions in the balance sheet optimisation and risk transfer space. The team’s goal is to assist clients in managing their financial risks, enhancing their capital efficiency and optimising their balance sheets.

We look at risk transfer through a variety of lenses with a client that may be seeking to address regulatory capital, economic capital or climate-related challenges, for instance, and these challenges tend to be a strategic priority for them. Overall, we aim to be innovative in terms of understanding a client’s capital needs and then proactively engage with the insurance market to develop corresponding solutions.

Q: Do you anticipate increased appetite from insurers for synthetic securitisations?
A: A small cohort of insurers and reinsurers entered the SRT market in 2017, but that cohort has grown over the past six years and new insurers continue to assess the benefits of entering the market. At the same time, unfunded deal volumes continue to grow, with insurers building a solid track record as reliable counterparts for banks. In general, insurers are strong counterparts and with claims experience in credit risk in general being very dependable, we anticipate a growing appetite from banks to work with insurers - which should have a positive impact on insurers’ appetite for synthetic securitisations.

Q: Are you seeing any developments that would enable insurers to participate in STS synthetic securitisations?
A: Insurers are highly regulated and highly rated counterparties with a demonstrable history of claims payment. Consequently, there is a very strong argument for allowing them to participate in STS-eligible SRT transactions and thereby broaden the sources of capital available for banks under the regime. It doesn’t make sense to exclude them from the framework and the hope is that regulators revisit this point in the future.

In the meantime, there is still a large proportion of non-STS transactions being executed, which allows for insurance participation. There are also potential solutions around using insurance to create funded deals that allow access to STS-eligible transactions.

There are different ways of working around this, such as combining insurance unfunded protection with funding from a third party. However, such a scenario entails identifying a source of cost-effective funding, so the combination of insurer and funder would need to be competitive.

Q: What is your outlook for the SRT market more broadly?
A: The SRT market has been through a number of cycles in a short space of time and has continued to deliver strong performance. This demonstrates the benefit of the sector, in that pricing remained relatively stable and deals continued to be executed when other markets were closed or extremely volatile.

Engagement with regulators has become more straightforward in terms of getting transactions approved, which can only be beneficial in terms of market growth. Especially following the recent bout of volatility in the banking sector, having a broad range of tools to optimise a bank’s capital position is extremely positive, and we expect this to entice new jurisdictions and issuers to enter the market alongside the more established players.

The implementation of Basel 3.1/4 is a significant area of focus and how it plays out will impact future issuance dynamics.

Corinne Smith