INSURITIZATION AND SECURIZATION: Alternative Investments

The first transactions in which illiquid assets were insured (Princess Private Equity Holding, Pearl Private Equity Holding and others) showed that this is a window of opportunity to the (re)insurer, and one that can be further developed.

This is true not only for private equity and hedge funds, but also for other alternative asset classes. Candidates for deals in this category include intellectual property, natural resources (including farmland, timberland and oil & gas investment programs), real estate (including hotel and shopping center real estate investment programs), high yield ("junk") bonds and distressed ("vulture") investment programs.

While the first insuritizations consisted of a pure risk transfer from capital markets to insurance markets, further developments tend to address special needs within the private equity world. Structures that help with capital underpinning, or create stable returns, instead of low returns at the beginning and high returns at the end (the so-called "J-curve" effect in private equity), or the insurance of overcommitment strategies which help to get access to more favorable line-of-credits, or structures that avoid the feared discount on publicly traded private equity fund-of-funds, insurance covers for single partnerships are only some of the examples.

Following the well-known cat bond securitizations, the future will show how quickly the market will adapt the new techniques to securitize insuritized transactions and to create additional insurance capacity for the insurer on one hand and new investment opportunities for investors on the other.

To date, only few other insurance type products in the area of private equity, such as the Prime Edge (structured by Deutsche Bank, Allianz Risk Transfer and Capital Dynamics) or Private Equity Partnership Structures I, LLC, a securitization of limited partnership interest structured by AON Corporation were seen. However, it is expected that further transactions will appear in the near future. On the hedge fund side, there are many more secured transactions, most of them issued by banks.

Together with its clients, Swiss Re is structuring highly innovative and effective transactions. Because of the complexity and lengthy development process of such transactions, the broad know-how base needed from the underwriters/ structurers on both insurance, corporate finance and investment banking, the dedicated team effort to move things forward, together with a clear understanding of the investors to be addressed by such a product are key factors to success.

For the future, streamlined and standardized processes on several structural and legal issues are expected. In addition, the growing sophistication of the investors that directly invest in such products or that indirectly provide (re)insurance capacity through securitizations will lead to a more efficient market from the competitor's and co-insurer's side. This is the edge of some very exciting developments of new products.