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Essays and Commentaries
Genuine Alpha, Perfect Security – Reaffirming ILS Rationales

January, 2009

By: Morton N. Lane, President

“Alpha” is the holy grail of the conservative investor. Alpha expresses that part of an investment’s return that is not related to general market returns. Thus an investment that does not fall when the Dow falls (and vice versa) is said to have high alpha. It would be a valuable diversifying asset to reduce portfolio volatility. Regrettably, such investments (or asset classes) are hard to find. Insurance Linked Securities (ILS) are, however, thought to be one such class. This chapter surveys the ILS market, its history and the claim that it provides genuine alpha.


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Catastrophe Risk Pricing: An Empirical Analysis
Septemper 6, 2008

By: Morton N. Lane, Olivier Mahul

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What Were We Thinking
November 24, 2008

By: Morton N. Lane

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Revealing Reinsurer’s Risk Preferences
June 1, 2007

By: Morton N. Lane, President

The objective of this paper1 is to examine the risk preferences of property catastrophe reinsurers. It is an empirical exercise and is focused on catastrophe reinsurance, particularly of the Bermuda companies. It is also a speculative paper. It is not clear whether trying to infer risk preferences from operating results is even possible, especially when such results have very short histories, in most cases of less than ten years2.

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Recapitalizing Reinsurers - A Never Ending Story?
January 31, 2007

By: Morton N. Lane, President

The early weeks of 2007 present a study in contrasts for both the property catastrophe reinsurance and insurance industries. The reinsurance industry has experienced a flood of new capital (of which more below) and has seen premiums turn lower from their June 2006 peak. In contrast, the insurance industry is galvanized by the actions of regulators, particularly in Florida, who have essentially mandated lower premiums for their citizen home-owners and decided to provide reinsurance capital via the enforced subsidy of their taxpayers. The reinsurance industry is largely unregulated, largely off-shore and driven by competitive market forces; the insurance industry is heavily regulated (by States) and appears to be largely driven by domestic State politics. In Florida the regulators want to extend the reinsurance that is provided at fixed prices from Citizens (their assessment and public backed insurer of last resort). Question is, which solution is likely to lead to lower prices over time (if they indeed should be lower) and which provides the healthier source of reinsurance capital? The answer seems self evident to us, and part of the reason for that is the track record of the reinsurance industry during the last 15 months. The amount of capital raised and the innovation that has been displayed is impressive. The purpose of this paper1 is to review and record that story. 

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Of Sidecars and Such
January 31, 2007

By: Morton N. Lane, President

Sometimesit happens that one word so captures the zeitgeist that it isimmediately adopted into the language as if it were always present. Soit was with the word “sidecar” at the beginning of 2006 in the languageof the reinsurance world. In the scramble to replace capital lost inthe Katrina, Rita and Wilma (KRW) hurricanes of 2005 a variety of newmechanisms was being utilized; sidecars was one of them. It was notexactly a new mechanism; by our count in the preceding ten yearsbetween $2 and $3 billion of capital had been raised by a mechanismthat would now be called a sidecar. Those forerunners were called by avariety of names, but generically could be called capped quota shares.Since re-branding, the same vehicles have raised some $6.5 billion innew capital in a period of 15 months, see Figure 1. The purpose of thisnote is to record that dramatic development and to lay out an “issuesset” for issuers and investors in these vehicles.

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Over the Top, But Not Off the Boil
November 20, 2006

By: Morton N. Lane, President 

Inour April 2006 review of insurance securitization “How High is Up?” weoffered a view of an index of reinsurance price shifts over time. Thatperspective allowed us to observe that premiums were at historic highsand close to their tops. If anything, we were premature in thatassessment. The months immediately after our paper saw a frenzy ofpre-storm season activity which resulted in peak prices in June andJuly of this year.

The question now at hand, however, is what prices to expect in the January 2007 renewals?
Theindustry traditionally gauges renewal prices at its annual gatheringsin Monte Carlo, Baden Baden and the PCI Conference, and this year’sverdict seems to be that this will be a “hard” renewal, i.e., priceswill remain high. However, that has to be qualified. It certainly willbe hard compared to last January, but how hard will it be compared tothe mid-year activity? There the answer is more vague. Consensusappears to be that prices will not be quite as high as mid-year butwill remain strong – over the top, but not off the boil, so to speak.

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What Katrina hath Wrought
January 6, 2006

By: Morton N. Lane, President

Itis now more than four months since those three wicked witches of thewest, Katrina, Rita, and Wilma, devastated the Gulf of Mexico and itssurrounding coast line.  Collectively, according to Property ClaimsService (Nov. 28), these storms caused over $50 billion dollars worthof insured loss and multiples of that in non-insured losses.  And, justas the physical landscape has changed but is slowly recovering, thefinancial landscape in the world of insurance has shifted and is beingrepaired.  Insured losses have rippled and are rippling through theprimary insurance market, the reinsurance market, the retrocessionalmarket and the hybrid market (i.e., cat bonds, insurance-linkedsecurities, industry loss warranties and the like).  Keeping track ofthese changes is not easy, but it is important.  Predicting the shapeof things to come as a result of change is, hopefully, easier thanforecasting a storm track, but the consequences for participants in anyof these markets can be just as severe.

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Unlovely Rita's Market Meter
September 24, 2005

By: Morton N. Lane, President

Thefollowing tables update the exhibits from last week’s note “Respondingto Katrina” in light of the potential impact of hurricane Rita on theTexas – Louisiana coast.  The message of the markets as of Fridayevening, when exact landfall and strength was unknown, is contained inthese updated tables.

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Responding to Katrina
September 16, 2005

By: Morton N. Lane, President

As of this writing it has been two and one half weeks since Katrina first made landfall (in Florida) and two weeks since Louisiana and New Orleans suffered their landfall and subsequent devastation.  And, as of yet, no one has a definitive estimate of the insured losses that will be suffered by the insurance and reinsurance industry as a result of Katrina.  The now most widely quoted estimate is by Risk Management Services (RMS) who released an estimate to their clients on Friday, September 9th that the total industry losses would be between $40 billion and $60 billion.  Shockingly high, but it is not exactly precise.

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