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Complete Listing of Publications With Most Recent Article First
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A Case Study in Credit Analysis |
Capital One (or Capital Two)?, July 31, 2000
By Morton N. Lane
INTRODUCTION
It was the best of reports; it was the worst of reports.
We
stretch the literary point, but, on July 21, 2000, Morgan Stanley Dean
Witter (MSDS) and Grant’s Interest Rate Observer (Grant’s) opinioned on
the credit worthiness of Capital One Financial Corp (COF). For the big
institution, the glass was half full; for the newsletter, it was half
empty. The full text of the evaluations is below, together with COF’s
financials. At its core, however, their difference can be seen from
the following excerpts.
Clearly, there is a divergence of view.
Although neither suggests a problem credit, MSDW would charge ahead –
invest more. Grant’s suggests caution – lighten up.
To read the full version of this article with graphs:
 Download the PDF Here
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Pricing Risk Transfer Transactions |
June 9, 2000. Published in The Astin Bulletin, Winter 2000.
By Morton N. Lane
INTRODUCTION
Should the pricing of reinsurance catastrophes be related to the price of the default risk embedded in corporate bonds?
If
not, why not? A risk is a risk is a risk, in whatever market it
appears. Shouldn’t the risk-prices in these different markets be
comparable? More basically perhaps, how should reinsurance prices and
bond prices be set? How does the market currently set them? These
questions are central to the inquiry contained in this paper.
To read the full version of this article with graphs:
Download the PDF Here
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Trends in the Insurance-Linked Securities Market |
May 31, 2000. Also Published in Derivatives Quarterly, Fall 2000.
By Morton N. Lane and Roger G. Beckwith
INTRODUCTION
There
is some debate about when the Insurance-Linked Securities (ILS) market
(a.k.a. Cat Bond market) began. Was it June 1992 with the
AIG-sponsored property-cat bond concept promoted by Merrill Lynch3?
Was it the end of 1992 when the CBOT launched its since-aborted ISO
contract? Or was it in 1995-96 with the first successful issuance of
an AIG-fronted PXRE property-cat portfolio deal with additional small
but successful portfolio deals from Georgetown Re and Reliance
National? Perhaps it was later in 1996 when USAA closed the first $500
million single-risk deal.
To read the full version of this article with graphs:
Download the PDF Here
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April 15, 1999, The Reliance III Case Study
Morton Lane, Ph.D.
At
the beginning of 1998, Reliance National purchased an option from
investors to issue a pre-specified insurance-linked note, at Reliance’s
sole discretion, anytime during 1998, 1999 or 2000. It was the first
“Optionable Note” in the growing market of insurance-linked
securitizations. Two other optionable securities have been issued
subsequently: (1) by Aon on behalf of Yasuda Fire and Marine (where
the option was embedded in a bond); (2) by Goldman Sachs on behalf of
Allianz, which used a structure very similar to that of the Reliance
optionable transaction. It is likely that such structures will be even
more popular in the future.
To read the full version of this article with graphs:
Download the PDF Here
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Risk Cubes or Price, Risk and Ratings (Part II) |
March 15, 1999. Also published in The Journal of Risk Finance, Vol.1, No. 1, Fall 1999.
INTRODUCTION
Risk
is difficult to measure – so difficult that no single measure seems
robust enough for all circumstances. This is especially true of
measuring the risk contained in insurance-linked securities. Insurance
risk is usually asymmetrically skewed. As a consequence, traditional
capital market risk measures – expected loss, probability of default
and the standard deviation of return outcomes – are less than perfect
to the insurance task. Without a good risk measure, it is impossible
to compare the risk-adjusted pricing of insurance-linked notes on a
consistent basis. It is impossible to tell which securities are cheap
and which are expensive. It is impossible to decide on their value
relative to more traditional invest-ments.
To read the full version of this article with graphs:
Download the PDF Here
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What the World Bank Should Do About Catastrophic Risk |
What should The World Bank do about it? A Personal View, January 15, 1999. Based on a presentation to The World Bank Disaster
Funding Seminar, "Financial Management of High Severity Risk in
Developing Countries", September 22, 1998, Washington D.C.
By Morton Lane
Today’s
seminar has shown that “insurance risk management is not just your
father’s homeowners policy” (to poorly paraphrase the Oldsmobile slogan
of some years ago). The preceding speakers have expertly demonstrated
that: (a) traditional insurance and reinsurance against catastrophes
has grown dramatically in the developed world; (b) that both
risk-transfer and funded cover mechanisms are available for catastrophe
protection; (c) that there has been a convergence between financial and
insurance markets instruments; (d) that large institutions are
protecting themselves against catastrophes by issuing catastrophe bonds
and derivatives as well as buying traditional reinsurance; and (e)
finally, that these new forms of protection use “index” or “parametric”
measures as well as indemnity losses, thereby expanding their
usefulness to developing areas. All in all, some huge changes are
rippling through the staid world of insurance, and the World Bank is to
be congratulated for organizing so timely a seminar for its
self-education.
To read the full version of this article with graphs:
Download the PDF Here
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Perfume of the Premium II |
December 21, 1998. Also published in Derivatives Quarterly, Spring 1999.
Shortly
after the introduction of insurance derivatives and the commencement of
their trading at The Chicago Board of Trade (CBOT), we began to analyze
catastrophe options by looking at the “implied loss distributions”
embedded in the traded prices. The results were recorded and described
in the proceedings of the 1995 Bowles Symposium, Georgia State
University, Atlanta, Georgia under the title, “The Perfume of the
Premium.”
To read the full version of this article with graphs:
Download the PDF Here
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Isolating the Effects of the Price Cycle on the Lloyd's Global Index |
December 15, 1998. Also published in The Risk Financier, March 1999.
INSTRAT-UK
recently proposed an index of underwriting results based upon the
Lloyd’s Global result. Since the index applies to a broad range of
underwriting lines, it is a good gauge of the whole insurance market,
and, perhaps, a good hedge of particular underwriting results.
Interest has begun to focus on the prices at which options on this index might trade.
To read the full version of this article with graphs:
Download the PDF Here
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December 23, 1998
The
basic idea is very simple: Let the share for which the option (or
under) writer is responsible increase as the penetration of the layer
gets larger.
The purpose of this structure is to reduce the cost
of traditional excess of loss (or pure option) coverage. At the same
time, the structure reduces volatility and provides for fuller coverage
as losses increase.
First proposed in the context of a price
guarantee program, the examples that follow are for Puts (or profit
share) structures, but they work equally well for Calls (or loss-share)
programs.
To read the full version of this article with graphs:
Download the PDF Here
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October 1, 1998. Also published in Insurance Finance & Investment, November 16, 1998.
What the heck is a zero beta asset?
Whaddaya mean new asset class?
Correlation coefficient?
You’ve got to be kidding me, adding earthquakes to my portfolio can actually reduce my risk!
Initial
investor reaction to presentations about insurance-linked notes and
their benefits in diversifying a portfolio often range from disbelief
to scorn. At best they are skeptical and we, like others, try to
persuade them of our rationality with explanations about “efficient
frontiers,” “diversification,” and “lower standard deviations”. Pure
as these theoretical arguments are, they are not always convincing.
To read the full version of this article with graphs:
Download the PDF Here
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