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Insurance-linked securities market seeks growth outlets

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HAMILTON, Bermuda — As the use and popularity of insurance-linked securities and alternative capital continue to expand, the sector is looking to build more robust practices as it searches for new avenues of growth.

Fund valuations and investor communication and reporting are becoming more vital.

“The asset managers know the investors are demanding more robust governance,” said Matthew Ball, director, risk consulting at Towers Watson & Co. in Bermuda.

“There are principles out there, but nothing set in stone for the ILS space at the moment,” said Mr. Ball. “So, we're kind of learning how to build these best practices over time in terms of ILS valuation.

“There are best practices developing in terms of valuation committees and external valuations,” said Mr. Ball, taking into account things such as the frequency of reviews and tighter turnaround times at month's end.

The transparency associated with catastrophe bonds as listed securities helps build investor confidence.

“The 144A (the U.S. Securities and Exchange Commission rule that governs securities) market is crucial to maintain the growth of the sector and maintain the dialogue with institutional investors,” said Philipp Kusche, director, insurance-linked-securities, for Swiss Re Capital Markets in Armonk, New York.

“Maintaining such dialogue will be difficult without transparent issuance volumes and transparent pricing information,” said Mr. Kusche. “I think without having such information it's incredibly difficult to convince new investors to be interested in the space.

“Without the catastrophe bond market and the transparency of the 144A market, I think the insurance-linked securities market wouldn't be where it is today,” said Mr. Kusche.

According to Aon Securities, there was $23.47 billion outstanding in catastrophe bonds at the end of the second quarter.

These and other speakers were discussing the growth of the convergent capital market at the ILS Bermuda Convergence 2015 conference Nov. 11-12 in Hamilton, Bermuda.

“How do we grow our asset class?” said Andre Perez, founder and CEO of Horseshoe Group, Hamilton, Bermuda.

“Part of the growing up is going to have to come up with effective corporate governance, an acceptable framework or at least acceptable standards of what valuation should be,” said Mr. Perez. “There's not one universal answer, but this is something I believe is the only way we're going to get the legitimate label of a real asset class.”

“It's pretty impressive to see all of the development over the last few years,” said Phil Kane, director of global transaction banking at Deutsche Bank in London. “The credibility that's now attached to the catastrophe modelers — there's nothing like it in any of the other insurance spaces, where the confidence that the industry has and investors have in the modelers is truly spectacular.”

Growth and expansion in the sector will likely come from risks that can be modeled.

“A lot of the money coming in right now is on the model-based side, the property/catastrophe, short-tail risk side,” said Gary Martucci, director with Standard & Poor's Ratings Services in New York.

“Catastrophe models actually do a very good job of quantifying risk,” said Lixin Zeng, CEO of AlphaCat Managers Ltd. in Pembroke, Bermuda.

Mr. Martucci, Mr. Zeng and others discussed alternative capital sector growth at the 2015 Standard & Poor's/PricewaterhouseCoopers Bermuda Reinsurance Conference, Reinsurance Reshaped, in Hamilton Nov. 10.

Geographical diversity among investors will bolster sector growth.

“You do have some more investors coming in — I think it's broadening geographically,” said John Seo, managing principal, Fermat Capital Management L.L.C., Westport, Connecticut, who added that he has clients on every continent.

Mr. Seo cited Asia, Australia and New Zealand as examples of where investor interest is rising.

“They all have invested in the asset class for years, but I think you'll see more from them,” said Mr. Seo.

Geographical diversification of perils will also help the sector grow.

“I expect that we'll be looking for other diversifying perils in other regions of the world, because the modelers do have models that cover earthquakes in Chile and typhoons in the Pacific,” said Mr. Martucci.

Due to the maturation of the market, “we have a far more sophisticated end investor now,” said Craig Wenzel, senior vice president, capital markets, for XL Group P.L.C. in New York.