AIG cat bond marks change in attitude towards ILS

That is the view of an investor and industry expert on ILS speaking in the wake of the launch of AIG’s latest catastrophe bond through special purpose insurers Compass Re. Thanks to the $400 million deal, AIG has now sponsored $1.85 billion of catastrophe bonds in the past three years.

John Seo, co-founder and managing principal at investment manager Fermat Capital Management, says the fact that AIG is now one of the largest issuers of catastrophe bonds in the world marks a major turnaround in both its and the wider industry’s attitude towards the use of ILS. A decade ago, the company was resistant to the idea. “This is kind of a ‘not your father's reinsurance market’ moment,” he said.

There are some specific reasons for the increased popularity of ILS with insurers. Apart from favourable pricing and healthy capacity levels at the moment, they can also offer to cedents benefits in terms of solvency requirements, according to Clive O’Connell, partner at Goldberg Segalla.

“Catastrophe bonds can offer a more attractive purchase than traditional reinsurance products, because of their effect on a cedant’s solvency criteria, due to the reduced amount of counterparty risk associated with them,” he said.

AIG entered into a reinsurance agreement with Compass Re to provide subsidiary National Union Fire Insurance Co. of Pittsburgh with a source of fully collateralised reinsurance protection against US hurricanes and earthquakes. The deal’s coverage runs for two years until December 2014.