Aon Benfield CEO: Economic Turmoil should be good for reinsu

The turmoil that has hit the global economy should be good for the reinsurance sector, according to Andrew M. Appel, chief executive officer of reinsurance broker Aon Benfield.

This will be a year where reinsurance has the opportunity to play a role in capital infusions into insurance companies,? Appel said in a London press briefing.

Reinsurance offers the advantages of being liquid, inexpensive and short-term, Appel said. Aon Benfield, he added, is advising its insurance company clients that they can buttress their capital positions with reinsurance until the debt markets become more accessible.

Already, a fall in credit spreads has created stirrings. ?While you haven?t seen significant debt issuance yet, you?re starting to see the market open up,? he said.

Appel suggested that the capital-enhancing role of reinsurance will be concentrated during this year. He also pointed to evidence that the hardening of some areas of the primary insurance market is being driven by reinsurance.

Appel predicts good prospects for the insurance-linked securities market, which, he said, was largely closed during the second half of 2008 as a result of the default of investment bank Lehman Bros.

For the last six months, Aon Benfield has been putting out the message that the overall return on insurance-linked securities has been relatively good. ?All our structures were basically in high-quality assets,? Appel said.

Aon Benfield is in the ILS market with ?a few bonds,? Appel said. In seeking to raise capital for its insurance sector clients, he said, the firm has its eye on signing up new customers, such as pension plans, which have not been traditional ILS buyers. With the capital base of the reinsurance sector down by 15%, Appel said, the worldwide market in insurance-linked securities could exceed $4 billion (3.08 billion euros) in 2009.

The major players are coming back in the market,? Appel said. ?So I think the ILS market is going to open up in the next 60 to 90 days.?

Appel, who has a master's of business administration degree in finance from the University of Chicago, spent 15 years with the consultant McKinsey, where he devoted about two-thirds of his time to clients in investment banking and the rest to insurance companies. He has experience in capital markets, equities, fixed-income, derivatives and personal lines insurance. In addition to Chicago, Appel?s career has taken him to New York, London, Zurich and Australia, where he lived for a year.

Appel warns that the expectations from private capital providers for ILS returns of over 30% are unrealistic. ?A market that is looking for extraordinary returns is not sustainable,? he said. ?It feels an awful lot like what got us here.?

If the reinsurance market can offer ?nice high teens, low 20s returns,? Appel said, there is opportunity for new capital to come into the industry in the second half of this year.

Appel expects the capital shortfall to contribute to mergers and acquisitions activity, as investors seek liquidity. ?Insurance is probably going to be one of the first sectors where true M&A comes back, as opposed to government-assisted M&A, like we?ve seen in the banking industry,? he said.

(By Robert O'Connor, London editor: Robert.OConnor@ambest.com)