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Insurance Securities: Cat breeders seek new varieties

As the fear of interest rate rises threatens virtually every market in the world ­ from sovereign bonds to high-tech stocks to emerging market securities ­ investors may no doubt be wondering where they can seek refuge.

Such an anxious environment may be the best thing to happen to catastrophe bonds, aka cat bonds. These structured financings, which transfer some of the catastrophic risk of property-casualty insurers to investors, have been struggling to get off the ground for the past several years. Investment bankers are trying to convince investors that, although cat bonds may be risky, such risks have nothing to do with interest rates and are thus not correlated with other financial assets. Bankers hope eventually the market will be akin to mortgage-backed or other asset-backed securities.

While most of the work on cat bonds has been done in the US, it was in Zürich last month that the largest, and first, public cat transaction was offered. Credit Suisse First Boston (CSFB) arranged the three-year Sfr400 million ($281.7 million) subordinated convertible bond for Winterthur Insurance, which was based on the risk of hailstorm damage to automobiles. The deal was sold to retail investors and trades on the Zürich Stock Exchange.

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