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Interest in insurance-linked securities rises

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MONTE CARLO, Monaco—Despite largely competitive rates for traditional reinsurance, buyers and issuers have shown keen interest in several forms of insurance-linked securities this year, experts said during the 55th annual Rendez-Vous de Septembre reinsurance meeting.

During the past year, there have been several sidecar formations to give access to retrocessional coverage, said Paul Schultz, Chicago-based president of Aon Capital Markets Inc. and Aon Benfield Securities Inc.

After a major loss, capital likely will flow into the market in the form of sidecars or similar vehicles that provide investors with a simple and swift exit strategy, he said during the Sept. 10-15 meeting in Monte Carlo, Monaco.

Catastrophe bond issuance stalled somewhat as the industry was “digesting the effects” of the Japanese earthquake and tsunami as well as the revisions to Risk Management Solutions Inc.'s Version 11 U.S. hurricane model, but interest is again increasing in cat bonds, said Dennis Sugrue, a director at Standard & Poor's Corp. in London.

“It has been a turbulent year” for the ILS market, largely because of the Japanese earthquake and tsunami, said Mark Coleman, a director at S&P in London.

S&P downgraded its rating of four natural catastrophe bonds in the wake of the Japanese earthquake and tsunami and 11 more after the release of RMS' new model, he said.

After the March disaster in Japan, demand increased for industry loss warranties, with buyers looking for U.S. windstorm and earthquake coverage, said Stefano Nicolini, senior vp at BMS Intermediaries Inc. in Westfield, N.J.

But after the Japanese earthquake, many buyers felt they needed to “reload,” partly because the loss came relatively early in the year and partly because they also were digesting implications of the revised RMS model, he said.

As demand for ILWs increased, so did the price. Between July and August, before Hurricane Irene, demand slowed somewhat, he said. Prices for ILWs likely will remain flat or increase slightly during the coming months, Mr. Nicolini said.

After the Japan earthquake, some of the prices being quoted were deemed high by buyers; then there was a period of quiet until a flurry of interest just before July 1, when prices fell somewhat, said Martin Davies, CEO of Towers Watson Capital Markets Ltd. in London.

Demand for ILWs picked up particularly around the time of Hurricane Irene, which made landfall in the United States last month and threatened New York, said S&P's Mr. Sugrue.

There also is increased interest in investing in ILS from pension funds, which view such mechanisms as uncorrelated risks, said S&P's Mr. Coleman.

“We believe ILS is a good asset class for pension funds because it is uncorrelated,” said Towers Watson's Mr. Davies, “and it has come of age as an asset class.”

Issuers have been doing deals to test their ability to do so and to establish a track record, he said. Most large European reinsurers have “dipped their toes in the water” in issuing some form of ILS, he said. “For some, it is an integral part of their strategy.”