Reinsurance companies are all cheap right now

[muscleman]

I am surprised to see that a lot of the reinsurance companies are so cheap on a PE basis.

The ROE of these companies are not bad either. Thoughts?

[topofeaturellc]

Its a cyclical industry, pricing has come down, but that's not reflected in earnings yet.

 

That's why most of the smarter ones are reducing their new business.

[frommi]

High investment income (p/e) / low interest rate environment (float is not that valuable therefore low p/b)?

[HJ]

1) You are on the front end of hurricane season, people are leery of going long cat risk purely on seasonality.

2) It is generally acknowledged that there is a bit too much capital in the industry, largely driven by influx of alternative capital (cat bond, insurance linked securities, side cars) in the reinsurance business.  Worse, those capital have lower return hurdle than trasditional reinsurer ROE's, as these are largely macro / fixe income types looking for uncorrelated returns.  And of course, every hedge fund manager wants to run a reinsurer ala Warren Buffett.  There is a theory out there that says reinsurance cycle will be structurally muted by capital of this nature.  Without the upside, there's little reason to bid these things up above book.

[jay21]

1) You are on the front end of hurricane season, people are leery of going long cat risk purely on seasonality.

2) It is generally acknowledged that there is a bit too much capital in the industry, largely driven by influx of alternative capital (cat bond, insurance linked securities, side cars) in the reinsurance business.  Worse, those capital have lower return hurdle than trasditional reinsurer ROE's, as these are largely macro / fixe income types looking for uncorrelated returns.  And of course, every hedge fund manager wants to run a reinsurer ala Warren Buffett.  There is a theory out there that says reinsurance cycle will be structurally muted by capital of this nature.  Without the upside, there's little reason to bid these things up above book.

 

I also think of reinsurance as being levered itself as well.  For example, an insurer does not want to take losses above $9.5m on one contract and cedes the rest of the exposure to the re-insurer on an expected loss of $10m.  The re-insurer books a $.5m liability and then the actual loss is $12m.  The losses were 20% higher than the expected loss, but the re-insurer's liability explodes to $2m or 4x the initial estimate.

 

The above is just an example and not entirely indicative of all reinsurance contracts, which obviously can be much more complicated and less levered than I showed.  I just wanted to demonstrate what happens when you start structuring out risk and adding attachment points, etc.

 

If pricing is soft and you experience losses, will you get hurt pretty bad and it has happened plenty with re-insurers.