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Change We Can Believe In

Annual 2009 ILS Review and Q1 2009 Quarterly Performance Review

April, 2009

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

“Change we can believe in” was a very successful political campaign for 2008. Let’s hope it is just as successful for the ILS market in 2009. The “change” necessary for the ILS market involves the security of funds on deposit at Special Purpose Vehicles. The “belt and suspenders” protection the market thought it had, prior to the Lehman default, was found wanting. For four now infamous, ILS securities the belt (the Total Return Swap, TRS) broke with that default of Lehman but the suspenders (the collateral behind the swap) were then found to be of inquality. The old arrangement did not provide security to either cedants or investors. Pre-Lehman TRS mechanisms need “change” and the market is now preoccupied with deciding which change to believe in.


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Quarterly Market Performance Report Q4 2008

December 31, 2008

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


ILS manufacturing plants haven’t produced much in the last four months. In fact, for holders of ILS portfolios things have gone into reverse. Some bonds have matured, others have been called early (Redwood, Blue Wings and GlobeCat LAQ). The par value of deals in our index stands at $11.6 billion, a drop of 10.3% from outstandings in the index at the end of the third quarter of 2008. In contrast to the manufacturing plants in Detroit, however, the problem is not a lack of demand. Instead there is continued debate about the best collateral model to produce, and, we suspect, indecision on the part of risk suppliers about their protection needs as they view their own wrecked balance sheets. Our prediction is that this will change by the end of the first quarter.


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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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Quarterly Market Performance Report - Q2 2008
June 30, 2008

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

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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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Quarterly Market Performance Report
October 15, 2007

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

A benign storm season (so far) has led to high returns for investors in cat bonds for the second year running. That is reflected in the quarterly report shown in the adjacent table. The (All Cat) quarterly return is 3.76%, which if repeated every quarter would result in an annual return of 15.04%. Given an average coupon of approximately L + 8%, this is only possible because of rising cat bond prices (falling yields or premiums). Historical Cat yields are plotted on page 6.

The adjacent Table also shows that we have subdivided the market returns into several categories. The first division is between pure Cat bonds, Life securities, and “Others” (i.e. non-Cat, non-Life). These latter categories are presently small, but worth tracking as they will undoubtedly grow. Note that the Life category only includes those bonds that provide a “risk analysis” to investors. That is typically not the case, for example, for XXX securitizations which are not included here. The second division of the insurance linked securities (ILS) market is between those bonds originally issued at an investment grade rating versus those originally issued at sub-investment grade, i.e., below BBB-. Many hedge funds seek high returns and do not invest in highly rated bonds, so a sub-investment grade index may be more reflective of their activity. Of course, funds also apply leverage.

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Developing LFC Return Indices
August 14, 2007

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

It is a non-trivial exercise to construct a set of indices representing the world of Insurance Linked Securities (ILS).  And, at the end of the exercise, there is neither a unique nor a precise formula for the perfect index.

In case this observation causes undue distress, it is well to be reminded of the variety of indices used to represent the US stock market. The Dow Jones Index is a price-weighted index of 30 stocks. At the other end of the spectrum, the Wilshire 5000 index offers market capitalization-weighted indices related to both total capitalization and float weighted capitalization. The S&P 500 index is float-weighted and the NASDAQ 100 is a “modified” market weighted index.  Each captures different aspects of the market and over time consumers have found utility in each of them.

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