Wednesday, April 12, 2006

RE firms suffering in 1st usual.

To no-one’s surprise, it was not a banner quarter for big reinsurers. Swiss Re continues to have their problems (which are fully deserved considering their arrogance of the past two years). Repeated calls for clarity in regards to the books were continuously rebuffed and critics ignored. Who has any idea what the real reserves and capital adequacy figures are for these firms? The rating agencies?

Still, all is certainly not lost. ROE is acceptable and early pricing appears favorable, but these firms remind one of the labyrinthine hey-day (pre-Spitzer/SarbOx) of AIG. At least Munich RE seems to be attempting something approximating transparency as apparently they will release RORAC figures soon. Lets hope that the other large players follow suit since most of their reinsurance exposure is in North America.

Notwithstanding the above, large firms that are managed well can do very well, especially in this environment of rising global interest rates and more advantageous pricing. Hannover RE is a perfect example of this. They ceded 30% their large P&C exposure with a “sidecar” securitization agreement (called “K5”) and should experience an increased share price as they have differentiated themselves as superior managers.

But the big guys are under increasing pressure…from the capital markets, reinsurance purchasers, the burgeoning start-ups in the Caymans and Bermuda, and, of course, the brokers who are (nominally at least) acting as agents for their clients and getting the most coverage for the least price. And the near commoditized models used by the ACE’s, XL’s, and Partner RE’s of the world are obviously not any worse than the “proprietary” (as if attaching a fancy word to a model increases its accuracy) models utilized by the big guys, who need to worry about this equation:

Relationships + Bermuda incorporation + RMIS model + capital = instant RE competitor

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