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Excess Capital at Insurance Conmpanies


Viking
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Insurance continues to be one of my favourite sectors. Stock valuations are at multiyear lows and well run companies have been hit hardest. I would like to believe W Berkley's call that we should see the start of a hard market beginning in Q4 of this year.

 

What I cannot reconcile is the large amount of capital that everyone seems to be sitting on and how the profitability of the industry appears to just keep rolling on (largely due to reserve releases). Until a large chunk of this excess capital is destroyed how will we see a hard market? Right now many firms are using excess capital to repurchase shares. Perhaps we will need to see some really ugly catastrophes (hit to  reserves) or a second financial crisis (hit to investments).

 

What is apparent to me is the current math is not sustainable. The P&C industry appears to be underwriting at a CR over 100 (on a current year basis). Bond yields are crazy low and long yields could come down further. And equities have had an amazing run.

 

As reserve releases slow, bond yields fall and equities go sideways (reasonable future scenario) we may see sentiment actually get worse as this soft market drags on into 2011.

 

How do we get a hard market with so much excess capital sitting on the books at so many insurance companies? 

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Insurance continues to be one of my favourite sectors. Stock valuations are at multiyear lows and well run companies have been hit hardest. I would like to believe W Berkley's call that we should see the start of a hard market beginning in Q4 of this year.

 

What I cannot reconcile is the large amount of capital that everyone seems to be sitting on and how the profitability of the industry appears to just keep rolling on (largely due to reserve releases). Until a large chunk of this excess capital is destroyed how will we see a hard market? Right now many firms are using excess capital to repurchase shares. Perhaps we will need to see some really ugly catastrophes (hit to  reserves) or a second financial crisis (hit to investments).

 

What is apparent to me is the current math is not sustainable. The P&C industry appears to be underwriting at a CR over 100 (on a current year basis). Bond yields are crazy low and long yields could come down further. And equities have had an amazing run.

 

As reserve releases slow, bond yields fall and equities go sideways (reasonable future scenario) we may see sentiment actually get worse as this soft market drags on into 2011.

 

How do we get a hard market with so much excess capital sitting on the books at so many insurance companies?  

 

 

Solvency II will dramatically increase capital requirements for European insurance companies by about Q2 of 2011.  The most practical way for them to meet these new capital requirements is by buying more reinsurance,  a LOT MORE reinsurance.  Well capitalized reinsurers may experience a substantial hardening of rates then.  This may lead to hardening in primary insurance markets, first in Europe and then worldwide.

 

Time will tell.   :)

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