Interest in bringing new business to the Bermuda re/insurance market is higher than it’s been in years.That’s the view of Jonathan Reiss, partner and insurance sector leader at Ernst & Young (E&Y) in Bermuda, who said there is a feeling that a harder pricing environment may be not too far away after a string a catastrophes made a dent in industry capital this year.“Over the last five months I have fielded more calls about potential new business activity than in the previous two years,” Mr Reiss said yesterday.“The industry is still strong, but there is less capital than there was 12 months ago. The next time there is some kind of crisis that demands a new injection of capital, Bermuda will still be the best place to do it.“Bermuda has speed-to-market and a brilliant reputation. Other jurisdictions might have one or the other, but no one else has got that combination.”Much of the interest has come in the area of insurance-linked securities (ILS), a label that is applied to the various forms convergence between the capital markets and the insurance industry, including catastrophe bonds, sidecars and insurance loss warranties.They give reinsurance companies extra capacity to write more business and cover bigger risks. Investors in ILS get the advantages of a product that is completely uncorrelated with other asset classes and which offers attractive returns, but they take on the risk of seeing their capital wiped out if the specific risk covered happens and triggers the bond.Also, some hedge funds, including Third Point and SAC, are in the process of setting up Bermuda reinsurance companies in anticipation of a harder market around the corner. While these are not examples of ILS, they are an example of how convergence is boosting the Bermuda market.ILS was the focus of the first panel at the P&C Insurance Outlook 2011 conference at the Fairmont Hamilton Princess yesterday, themed “The Road Ahead”.Industry veteran Don Kramer, who has founded a string of reinsurance companies including NAC Re, Tempest Re and Ariel Re, was one of the panellists. Mr Kramer, who this year set up a new asset management company, ILS Capital Management Ltd, explained to around 250 delegates why these days ILS is a more attractive way for investors to put money into the insurance industry than setting up new insurance companies.“The Class of 93 really created the environment that led to Bermuda being the leader in the catastrophe market,” Mr Kramer said. “At the end of the first year, they went public at 120 percent of book value. To the private-equity guys, this was a home run, it looked like easy money.“The difference today is that companies trade on book value rather than earnings and so it’s not so attractive to form a new company. So you can get 15 or 20 percent return on equity, if you’re lucky enough to get it, and find that you’re stock’s trading at 80 percent of book value.“The lack of exit opportunities have changed the market. ILS capacity can come in and then be withdrawn, so there is ease of exit.”Another key factor in the rise of ILS was the impact of rating agencies. He pointed out that the Class of 1993 companies took early blows from the Northridge earthquake in January 1994 and the Kobe earthquake a year later.“Had the rating agencies been around they might have put these companies on ratings watch negative and downgraded them before they had a chance to rebuild their capital,” Mr Kramer said.He added that low interest rates had severely squeezed investment returns, from Treasury bonds and other asset classes. ILS could offer yields that were “unobtainable” elsewhere. “In this environment, coming up with a high-yield, non-correlated product seems very attractive,” Mr Kramer added.Fellow panellist Beat Hollinger, head of Munich Re Capital Markets, said the appeal of ILS had grown through the impact of events during the 2008 financial markets crash.“If you look back at what happened in 2008, cat bonds were still trading at 90 to 95 cents on the dollar while many other assets were trading at 50 to 55 cents,” he said.“People are interested in diversifying their risks and ILS makes sense because the capital markets are so much larger than the insurance markets.”Germany-based Munich Re, the world’s biggest reinsurance company, has listed some of its catastrophe bonds on the Bermuda Stock Exchange, which can now boast ILS listings with a value of almost $3 billion.Mr Hollinger believes that the ILS market will continue to grow and could be capable of attracting investors on a much larger scale if it offers greater opportunities for building a diversified risk portfolio. He estimated that currently the market was about 70 percent exposed to US hurricane risk, a heavy weighting for one category.Another panellist was Greg Hagood, co-founder of Bermuda-based Nephila Capital, an asset manager that oversees around $5 billion of insurance-related investments.Mr Hagood saw huge potential for the ILS market in the coming years, particularly in helping to cover burgeoning risks currently shouldered by the public sector.“There is a lot of risk sitting with governments,” Mr Hagood said, “and a), it shouldn’t be; and b), it’s not being transferred to the capital markets.“The state of Florida bears about 30 percent of homeowners’ risk. Why should that be at a time when the Florida economy is shrinking dramatically?”Other US states, including Texas, Massachusetts and Mississippi, also carried high levels of homeowner risk and there were great potential growth opportunities for the industry in finding solutions for these situations.