Tuesday, April 5, 2011

Reinsurers: Benefitting From The Disasters

Reading the media we find disasters everywhere: Japanese nightmares, flooding in Australia, earthquakes in New Zealand, just to recall the latest. Shouldn´the stocks of the reinsurers be down? These companies are covering the risks of other insurance companies and now have to pay for a huge part of the damages. They might pay $35 billion for the Japan disaster alone, according to Flagstone Reinsurance Holdings.

But the stocks of reinsurers don´t fall - quite the contrary! Yesterday reinsurance stocks hit a new 52-week highs. Shares of RenaissanceRe Holdings (RNR) and Arch Capital Group (ACGL) climbed on new highs.

The reason: The investors are betting that the series of global disasters will allow the reinsurers to raise their fees. Reinsurers get payments for the risk they take. The higher the supposed risk, the higher the fees.

So, investors now believe, that history is repeating itself. In times of high risks the reinsurers get high fees, but in low risk times they get less. The series of disasters should lead to higher reinsurance fees and therefore higher profits for these finance companies.

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