Class of 2005 caution

Hello again. There’s an article here from the New York Sun on reasons why shareholders should be cautious about the new wave of reinsurers.

The principal concerns they highlight are those linked factors, rates and capacity:

The primary concern is that reinsurance rates, which popped after Katrina, Rita, and Wilma blew through, may not continue at such high levels. The rise in rates, along with clear memories of the opportunities that awaited the fleet investor the last time around, attracted significant new capital overnight. This came not only from the start-ups, though they alone brought in $8 billion of new capital within three months.

Existing companies, too, were able to raise considerable new money through the issuance of cat bonds and through sidecars. The latter refer to special-purpose pools of capital raised by existing firms that are designated to new investments, and therefore attract those interested in taking advantage of new, higher, rates. That’s bad news for the newcomers, who have previously had the opportunity to compete in a capital-starved industry for a longer period of time.

They also point to the fact that this year’s better than average hurricane season may well lead to a relaxation of underwriting discipline, further falls in rates, general shambolicness. And their tips for the tip – or at least survival – are Validus and Ariel Re. Hmm. Let’s return to this next year.

[Note to self: revisit this page a year today for an update].

UPDATE: 27 Oct 2006 – didn’t even have to wait that long. In an article in yesterday’s Royal Gazette, from Bermuda, Evan Greenberg, CEO of ACE, is reported as commenting that

rates continue to soften around the world at roughly the same pace we have been experiencing throughout the year.

New business pricing tends to be more aggressive and at times undisciplined. There are numerous examples of new business coming to market where the pricing in our judgment is inadequate.