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USAA Prime
September 3, 2001.

By Morton N. Lane and Roger G Beckwith
 
INTRODUCTION
In November 2000 Munich Re entered into a financial swap transaction with a special purpose vehicle, PRIME Capital Hurricane Ltd. (PRIME), to protect itself against losses resulting from severe hurricanes hitting defined areas of New York and Miami.  PRIME in turn funded its swap (or counter party) obligation by issuing securities to capital market investors.  It issued $6 million Class B preference shares and $159 million Floating Rate Notes.  PRIME agreed to pay its note purchasers an interest rate of LIBOR plus 650 basis points quarterly for the next three years.  At the end of the three years the investors receive return of their principal, if no hurricanes of the requisite intensity have blown in the designated areas of New York and Miami.  If an adverse wind has blown, investors could lose all or part of their principal.

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Analyzing the Pricing of the 2001 Risk-Linked Securities Transactions
July 31, 2001. Presented at the IIASA-DPRI meeting on Integrated Disaster Management in Laxenberg, Austria, August 2001.

By Morton N. Lane

INTRODUCTION
Ten risk-linked securities (a.k.a. cat bonds) were issued between April 1, 2000 and March 31, 2001,2 representing almost 25% of the risk-linked securities that have ever been issued.  The reinsurance risks embedded in these securities were similar to exposures contained in the previous year’s issues (wind and quake), with new forms added and some new risks covered.  The exact character of the exposures was examined in an earlier paper “Current Trends in Risk-Linked Securitizations”, available on our web site (www.LaneFinancialLLC.com).  The purpose of this companion piece is to continue the analysis of these securities, but to focus exclusively on their pricing.

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Current Trends in Risk-Linked Securitizations
April 30, 2001. Also published in Risk Magazine, August 2001

By Morton N. Lane and Roger G. Beckwith

INTRODUCTION
Towards the end of the year 2000 any paper describing current trends in insurance-linked (now fashionably dubbed risk-linked) securitization would have been short.  There was one trend to describe them:  declining -- to the point of disappearing -- issuance.  In November, however, Munich Re and AGF rode to the rescue.  At 12-month end, given our off-calendar summaries of activities (March to March), the score is not so bad.  Given completion of SR Wind, initiated in March but completed in April, the box score for the last year is:

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Stirrings in the Secondary Market
March 8, 2001.

By Morton N. Lane
 
INTRODUCTION
There is some evidence that the secondary market for insurance-linked securities (ILS) is beginning to stir.  It is faint, but we think it is important.  Viable secondary markets contain important intelligence about underlying trends.  In the ILS market, where underlying (reinsurance) price trends are hard for outsiders to discern, secondary market prices could provide valuable investor information.  This allows investors to better evaluate new transactions.  It also gives issuers a better insight into what new issue prices would be acceptable in the capital market.  So far, the still nascent ILS market has provided little price information outside of new issue prices.

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CDO's as Self-Contained Reinsurance Structures
December 10, 2000

By Morton N. Lane
 
INTRODUCTION
“Convergence” between the capital markets and reinsurance markets is not the hot topic it once was.  However, “convergence” has led to this:  the prime mover of insurance risk via securitizations is an investment bank (Goldman Sachs) rather than an intermediary; and, one of the most active leveraged underwriters of capital market credit risk is a reinsurer (Swiss Re) rather than a hedge fund or bank.  Both phenomena provide testimony to the institutional consequences of “convergence” but other effects, particularly product design, are also continuing apace.  One such product is the Collateralized Debt Obligation (CDO) – subspecies of which are Collateralized Bond Obligations (CBOs) and Collateralized Loan Obligations (CLOs).

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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.
 
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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.

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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.

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An Optionable Note
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.

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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.

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