Jardine Lloyd Thompson Group, a risk management advisor and insurance broker, and ICAP, an interdealer broker, formed a joint venture that might, among other deals, originate and structure insurance-related ABS deals.
Noting that the use and variety of structures by which investors can invest in the insurance market, Dominic Burke, CEO of JLT, said that the development of the insurance-linked finance market is still in its infancy. That market, however, appears to hold great promise as volumes grow and transactions become more sophisticated.
"This is a sign that there is a lot of interest in catastrophe risk and securitizing it, and that capital markets investors are turning their attention ever more in this direction," said Jacob Weber, an associate director for Chicago-based Aon Capital Markets, a company that does a brisk business in risk capital products. Starting in late 2005 and continuing through 2006, the spreads being paid for catastrophe bond risk were wide, delighting investors that were already participating actively in the asset class.
Asset securitization is playing a larger role in managing all types of risk for corporations. Collateral can range from traditional life insurance policies to contracts that hedge against major national and global concerns such as hurricanes along the Gulf Coast, windstorms in Europe or potential fallout from a bird flu pandemic, say industry sources. The market is not limited to securitizing premiums from insurance policies: they include private structured finance transactions wherein one party underwrites risk for another.
Fitch Ratings, which tracks the amount of bonds issued to manage such risks, estimated that in 2005, roughly $5.6 billion in insurance-linked and risk-associated asset-backed bonds were issued to manage embedded value, XXX, property and catastrophic mortality risk, among others. This includes 144A deals. In 2006, issuance spiked to about $8.9 billion.
The ratings agency estimated that in 2007, issuance could potentially increase by 30%, said Don Thorpe, head of Fitch's ILS group. The agency did caveat that prediction, however, after the Florida Hurricane Catastrophe Fund, a state administered reinsurance program, doubled its capacity. That move is expected to take a lot of premiums out of the private market, based on the thinking that demand for catastrophe bonds will decrease, said Thorpe.
Pre-Katrina spreads on catastrophe bonds were at 600 over Libor and they widened out to 800 points over in post-Katrina pricing, Weber noted. Pricing pulled back a bit since January, to around 700 basis points, said market sources.
Joint ventures similar to that of JLT and ICAP have been set up before. Usually, a large insurance or reinsurance broker without a capital markets operation forges such an agreement with an investment bank, because the latter has access to capital markets investors to whom they can distribute bonds.
Whether risk management for storms in the Gulf Coast or other regions is largely handled outside the asset securitization market, professionals in the insurance-linked securities market are looking forward to a period of expansion and product innovation.
"The mechanisms by which risk will be covered or managed and the structures and instruments by means of which the capital is subscribed ... are subject to a process of development that can only accelerate," Burke said.
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