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). To read the full version of this article with graphs:  Download the PDF Here

 

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

 

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

 

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