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Insurance securitization: US cats may lead insurers out of the backwaters

Every so often the insurance-linked securities (ILS) sector rears its head and FIG bankers get excited that they will have a rich vein of new assets to bring to the capital markets. Around two years ago the great hope was that value in force (VIF) securitizations from UK insurance companies would take off following a couple of landmark transactions and regulatory encouragement from the Financial Services Authority, but activity there has slowed to a near halt. Once again there are now signs that investment banks and insurance brokers are ramping up their product capabilities amid a pick-up of deal flow in the past year.

"As a firm globally we’ve probably done 80 or so transactions since the market’s inception. In Europe we have probably done five over the past 12 months – if that is an indicator of [the future rate of] activity I’m pretty excited," says Elizabeth Gilbert, managing director and head of the insurance financing group at Goldman Sachs.

Evidence that this sector is finally taking off is provided by an uptick in the volume of issuance, the variety of issuers and the diversity of investors that are starting to be interested in the asset class. In fact the pure volume of issuance to have taken place in the first half of this year is more than in the whole of 2006.

"Over the past 10 years, the catastrophe bond market has staggered from zero to around the $8 billion to $10 billion mark," says Tom Keatinge, head of insurance debt capital markets at JPMorgan. "This could easily be a $100 billion a year market, if you consider the size of the underlying risks," he argues.

If Keatinge’s hopes are met it would mean that insurance-linked securitization would no longer be a relative backwater, with risk transfer in the insurance sector largely the preserve of the largest reinsurers.

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