November 14th - 17th, 1999
Hyatt Regency Miami, Florida

The Capital Market Landscape

Joe Kavanagh, VP, Marsh & McLennan Securities Corporation
Moderator: Thomas Wronski, Dir., Insurance & Risk Management, Fidelity Investments

Monday, November 15th, 2:00-3:15 p.m.

"Financial-Services Reform May Fuel Securitizations"

Financial-services deregulation signed into law last week by President Clinton is likely to increase the number of securitizations based on future revenue streams.

The law will create the opportunity for new products to be offered from new sources, Thomas Wronski, director of Insurance & Risk Management, Fidelity Investments, said Monday at the Ninth World Captive and Alternative Risk Financing Forum.

These investment vehicles are created by determining the value of a future revenue stream from known quantities. The entity that generates the revenue is paid a discounted price up front. The securitized product is typically sold to institutional investors.

One of the first such securitizations was the Bowie Bonds, bonds that were based on the future revenue stream of recordings by singer David Bowie. It was purchased by Prudential Insurance Company of America. One of the newest such securitizations is the New York Tobacco Bond, which will securitize the $680 million that New York State expects to receive as the result of litigation against tobacco companies.

Auto and homeowners insurance policies are likely candidates for future securitizations, Wronski said.

The main concerns for investors are liquidity and the lack of a central distribution source.

While future revenue stream securitizations are growing, some insurance-related securitizations such as catastrophe bonds are not as likely to multiply, according to Donald J. Riggin, vice president and head of the Risk Services department at Schiff, Kreidler-Shell Inc., a Cincinnati-based broker/consultant.

Cat bonds typically cover the probability of losses from a major hurricane or earthquake. This securitization of risk vehicles is less likely to multiply rapidly because they are so complex. It takes six to nine months to create one, and they are highly individualized, have limited diversity potential and appeal to a limited investor pool, Riggin said.

A more popular securitization are PCS Catastrophe Options, which are traded on the Chicago Board of Trade, he said. Insurers use them to fill gaps in their traditional reinsurance program, add short-term coverage before, after and during a loss period, hedge retention levels and balance their risk exposure geographically, he said.