June 13, 2011 / 12:36 PM / in 8 years

Quake-struck insurers eye flexible capital

* Sidecar market revives in 2011 - analysts

* ILW prices up 30 pct in year to date - broker

* CME hurricane derivative trades soar

By Myles Neligan and Sarah Mortimer

LONDON, June 13 (Reuters) - Insurers battered by a spate of costly natural disasters are fuelling a revival in demand for flexible capital instruments as they top up their finances to take advantage of rising insurance prices.

The market for such structures, which allow insurers to raise funds more quickly than through traditional equity or debt, is set for a new lease of life after largely stagnating in 2009 and 2010.

“It’ll certainly be busier than the last two years, which were very light on issuance,” said Nick Pope, an analyst at stockbroker Jefferies International in London.

“We’re in a hard market for certain classes, and that’s where you start to see alternative financing structures coming in.”

The industry’s burgeoning appetite for flexible capital is demonstrated by the $2.3 billion it has raised so far in 2010 through “sidecars”, specially created subsidiaries funded by outside investors, according to figures from industry publication Insurance Insider.

That compares with virtually zero in 2010, when intense competition weighed on insurance prices, eliminating any incentive to raise capital.

The upturn comes as the industry seeks to cash in on a strong increase in the price of some types of insurance after an unprecedented run of natural disasters in the first quarter inflicted $50 billion in claims on the industry.

Analysts caution that with insurers still holding ample capital overall, take-up of alternative funding will fall far short of the record levels seen in 2005 and 2006, when the industry rebuilt its balance sheet after Hurricane Katrina.


But demand could get another boost if a big insured loss during the June to November U.S. hurricane season helps push insurance prices up further.

“If the wind blows, that could be the defining event that really jump starts the market for alternative funding,” said Jeff Mohrenweiser, an analyst at Fitch Ratings in Chicago.

The 2011 Atlantic hurricane season is predicted to be busier than average, with forecaster NOAA expecting six to 10 hurricanes, of which half could become major.

The industry is also making greater use of innovative instruments that allow reinsurers to pass on some of their risk to financial market investors, freeing up capital to underwrite new business.

The price of Industry Loss Warranties, which allow reinsurers to buy protection against catastrophe losses from hedge funds, is up by 30 percent since the beginning of the year, according to Stefano Nicolini of reinsurance broker BMS.

The volume of hurricane derivatives traded on the Chicago Mercantile Exchange has soared to 27,000 so far this year from just 1,650 in 2010, partly reflecting increased interest from insurers seeking to manage their exposures, according to CME managing director Tim Andriesen. [ID:nRTV225073]

But the proliferation of flexible capital instruments could paradoxically also curtail the cyclical recovery in insurance prices, confounding industry hopes of a sustained increase.

“In former times, a big industry loss translated pretty quickly into a hardening of rates,” said Matthew Fosh, Chief Executive of Lloyd’s of London insurer Novae NVA.L.

“But the capital transmission process is so much more sophisticated now that the correlation is not as close as it used to be.” (Editing by Will Waterman)

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