By: Brian Way

Brian Way — Thu, 03 Feb 2011 01:29:42 +0000

I keep hearing people, anyone from CEO to CFO esposing this theory that the market needs a good Cat event to wipe out 75 billion to 100 billion in capital to bring back a hard market and the good times. I really know very little about the insurance or re-insurance market but this doesn’t seem to make much sense to me. I appears that too much capital came into formation in the market because people were searching for yield and they thought they saw an opportunity to get say 18-22% returns. Well it turns out that with the great recession, less insurance demand is occuring an less is being ceded to the insurers. On top of this the income side of the equation has disappeared as Treasuries and Fed Funds are so low. So with this troika of too much capital, low yields and less suppply- returns have dumped and expected returns are in the low to single digits instead of the 20% region. Equity holders are trapped and this is reflected in the market cap which is trading at a discount to Book Value- as it should. If you want to get out you can take the big hit now and invest elsewhere or stay with the long route and get your 5% returns. Re- insurance stocks may be trading at a discount to book but book should move up at that 5% rate per annum. Saying that they need to take a capital hit and destroy book value so that there will be a shortage of capital and more opportunity to grow book value at a higher rate is plain simple. I guess there guys think there is an endless line of lemmings to come give them more capital whenever they destroy it?? Please explain.

Comments on: Report: Re/insurers Require ‘Mega-Catastrophe’

By: Brian Way