Yet, at the same time as the bias of earnings revisions for next year are mostly negative, with, in many cases FY14 below this year, you've got the reinsurance sector stocks on a veritable tear as if they had portfolios loaded with beta, despite most having highly-constrained risky asset or FX exposure on their investment side, with the exception of the ubiquitous credit hemorrhoid that flares up from time to time, and the odd moderate duration land mine. And it seems like every large multi-strat hedge fund has started a reinsurance company or reinsurance strategy - whether for
Even for a long-time bull upon reinsurance as I am, I must admit to being worried. There is no doubt that there
Yes, the soft market has arrived, and if your job is to underwrite risk, then that is what you do, what you must do, and, like the ticking of a clock, what you will do. And almost all will do it irrespective of the pressure upon rates, whether or not storms are getting more severe, because heaven forbid you return it, or lose market share or customers (or bonus!). Together this leads to more-than-a-creep in implied leverage as fence-swingers, the ignorant, or charlatans target rates of return with little regard to the risk required to attain it. This is to the [immediate] benefit of everyone involved - brokers, underwriters, newly-minted fund managers, alternative risk-transfer professionals, the modeling community - everyone …. except the veritable principals…the owners of capital. The dutiful participate, and the more thoughtful whinge as they do so with a sense of forboding, but few to none leave the party, whatever their doubts. And as Sound familiar?
When formerly good trades become overly crowded and go bad, the majority lose more money than they ever made. When the price is right, one is, over time, compensated for taking risks. In a very soft market, with a serious loss event(s) the damage can be, and often is, terminal. With so many new entrants and so much new capital combined with a rapidly-softening market, it is increasing-likely many will, unluckily, though not unsurprisingly, lose more than they ever made.