Capital Is Coming--For Better or for Worse

Capital markets dig insurance more than ever. The feeling isn't entirely mutual.

By Matthew Brodsky

Catastrophe bonds have experienced tremendous growth since the hurricanes of 2005, say analysts, but some reinsurance executives are not buying what the capital markets are selling.

Total outstanding risk capital in CAT bonds nearly doubled from 2005 to 2006 to $8.48 billion, according to a Guy Carpenter report.

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And tremendous growth will continue, said Cory Anger, senior vice president at New York-based financial-services firm Lehman Brothers Inc. For investors, Anger said, "it's now worth their time to analyze the risk."

Sidecars, on the other hand, could be soon phased out as a vehicle for the capital markets to enter the world of reinsurance.

"Sidecars are a short-term solution," said James Matusiak, director at consultancy PricewaterhouseCoopers.

That solution was needed after hurricanes Katrina, Wilma and Rita, which explained the $3 billion in sidecar activity after those 2005 storms, said James Brender, associate director at ratings agency Standard & Poor's.

But the environment in the market is no longer conducive.

Meanwhile, CAT bonds, said Matusiak, offer capacity at a price that does not exist in the retrocessional market.

Yet not all insurance executives and observers are enamored with that capacity. "I wonder if they're just creating too much capacity out there," said Andrew Kligerman, managing director at UBS Securities LLC, the U.S.-based broker-dealer arm of the Swiss financial-services company.

Some in the capital markets could be "naïve" about the nature of risk in reinsurance, said Patrick A. Thiele, president and CEO of Partner Re.

As a "risk taker" confident in his company's ability to evaluate risk, Thiele said that Partner Re didn't use capital markets or the traditional retrocessional market.

The executives and analysts spoke at Standard & Poor's Insurance 2007 conference in New York. Other reinsurers there--such as Joseph Brandon, chairman and CEO of General Re Corp., and Nikolaus von Bomhard, CEO of Munich Re--agreed that their companies relied little on retrocessional capital.

As Brandon said to an entertained audience, his company's view is that whoever brings capital into the market is "evil" but whoever returns it is "doing the Lord's work."

August 1, 2007

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