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What Were We Thinking

November 24, 2008

By: Morton N. Lane


News about the quality of collateral behind certain ILS notes has now broken into public view with the revelation by the Insurance Insider (Nov. 14) that Ajax’s collateral account contained Ballantyne Re tranches. Price action in the secondary markets has suggested problems with collateral for some time, but the subject (if not the detail) is now in plain sight. It is another blow to the insurance linked securities (ILS) market.


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Catastrophe Risk Pricing: An Empirical Analysis

Septemper 6, 2008

By: Morton N. Lane, Olivier Mahul

The price of catastrophe risks is viewed by many to be too high and/or too volatile. Catastrophe risk practitioners point out that, contrary to standard insurance, such as automobile insurance, catastrophe re-insurance is exposed to infrequent but potentially very large losses. It thus requires keeping a large amount of capital in hand, generating a cost of capital to be added to the long-term expected loss. This paper pulls together data from about 250 catastrophe bonds issued on the capital markets to investigate how catastrophe risks are priced. The analysis reveals that catastrophe risk pricesare a function of the underlying peril, the expected loss, the wider capital market cycle, and the risk profile of the transaction. The market-based catastrophe risk price is estimated to be 2.69 times the expected loss over the long term, that is, the long-term average multiple is 2.69. When adjusted from the market cycle, the multiple is estimated at 2.33. Peak perils like US Wind are shown to have a much higher multiple than that of non-peak perils like Japan Wind, revealing the diversification of credit from the market.


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Quarterly Market Performance Report Q3 2008
Septemper 30, 2008

By: Morton N. Lane, President. Roger G. Beckwith, Vice President

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Beyond Convergence, Towards Integration
August 29, 2008

By: Morton N. Lane, President

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Capital Markets Reinsurance Inc.
August 29, 2008

By: Morton N. Lane, President

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The Measurement of ILS Returns
August 29, 2008

By: Morton N. Lane, President

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Quarterly Market Performance Report - Q2 2008
June 30, 2008

By: Morton N. Lane, President; Roger G. Beckwith, Vice President

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What Price ILS?

March 31, 2008

By: Morton N. Lane, President; Roger G. Beckwith, Vice President

The twelve months to Q1 2008 (our typical analysis period) has seen more than $7.3 billion new ILS come to market. This is a record. One senses that the ILS market is now an established part of the reinsurance and retrocessional scene to be used by insurers and reinsurers alike as tools in their risk management deliberations. Indeed, as the ILS tool was taken up more and more in the current climate, some tools were used less. For example, sidecars, one of the 2006-2007 tools de jour, dropped in use. New equity issue and new company listings, also tools de jour in 2006 and 2007, were replaced by share buy-backs in 2008. Evidently the capital cycle has turned. Next we might see acquisition and consolidation. The hard market of 2006-2007 has given way to a softer 2008. This is seen directly in prices of new ILS, a subject we turn to in greater detail below, but it is also seen in structures of the ILS being issued.

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Quarterly Market Performance Report - Q1 2008
March 31, 2008

By: Morton N. Lane, President; Roger G. Beckwith, Vice President

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Quarterly Market Performance Report Q4 2007
January 15, 2008

By: Morton N. Lane, President; Roger G. Beckwith, Vice President

A fourth quarter with few catastrophes and rapidly softening prices has made for excellent mark-to-market total returns of our (All Cat) index of ILS securities (Tables 1 & 2). A fourth quarter total return of 3.08% completes a twelve month compound return of 14.86% for 2007. This is the highest calendar annual return in our six year recorded history. It would also be the highest calendar annual return for those investors confining their attention to all sub-investment grade cat bonds. The sub-investment grade index shows a quarterly total return of 3.46% for a twelve month 2007 compound return of 16.23%.

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