Catastrophe risk is attractive to the capital markets investors due to its low correlation with other risks on their portfolios. Klugman said the $40 million deal was a response to growing investor interest over the last year in adding catastrophe risk to portfolios. The CDO structure was selected, she said, for the leverage it provided.
"What we're finding is that our investors are allocating a lot more dollars to this sector," Klugman said. "Because of the limited supply to date fo cat bonds and the fact that a lot of investors who do have cat bonds are loathe to sell them [due to the short supply] we try to meet the demand on a derivatives basis for the same type of risk," she said.
The ILWs for the deal were facilitated by Willis Re, which acts as a broker in the ILW market.