It might not appear particularly magical but Merlin CDO 1 BV does stand out as the first synthetic CDO of insurance and reinsurance entities. Structured by SG CIB, the transaction provides Hannover Re with credit protection on 99 reference entities in the reinsurance sector. It has sold reinsurance recoverables credit risk into the capital market.
One way reinsurers manage risk is through buying retrocession from other reinsurers – in other words laying off risk. Historically, Hannover Re was heavily reliant on retrocession but the rating agencies had voiced their unhappiness with the amount of reinsurance recoverables this left on its balance sheet.
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