from the publisher of reinsurance and fac magazines

« Dodge a bullet, get hit by a bazooka | « Main | Slap me once, get hit by a crowbar »

The bear (market) necessities

Dear man cub,

It is one of the laws of nature that every moment of strange elation must be balanced by an equal and opposite feeling of crestfallen emptiness.

And as the world economy looks like it is starting to take on water, the big question this week is:

Are you feeling deflated yet?

Well, if you are a Swiss Re shareholder you might be feeling a little green around the gills.

The mighty’s shares fell 17% this week after its billon dollar sub-prime confession on Monday morning hit the market right in the chops.

It was quite an overreaction — but then that’s what markets do — they overreact on the upside and they overreact on the downside. It’s what makes investment so much fun!

There is a lot more emotion in markets than people, or models, give credit for (which is of course why we are in the middle of a mild credit-induced panic in the first place!)

Why should a Swiss Re share be worth 97 Swiss Francs last Friday evening and only 81 by last night?

The problem is one of image. In the last couple of years Swiss Re has increasingly sold itself as being the bridge between the capital markets and the boring and financially ultra-conservative traditional reinsurance marketplace.

Here’s the story:

It had become the king of the reinsurance swingers. It had hit the top and had to stop — so it started to develop new markets. Shareholders always need a bit of a growth story to give them a final reason to buy a stock – and here was a good story. This was (and probably still is), the firm’s future growth engine.

But in a break from the Jungle Book analogy, this most highly evolved primate even got as far as discovering man’s red fire but the trouble was that he hadn’t realised quite how fire burns!

I listened in to the end of the analysts’ conference call on Monday afternoon and it was not pretty. Wave after wave of difficult questions came and went — some of which couldn’t be answered immediately — and the tone was strained.

A note published the following morning spoke of a loss of confidence in senior management and how once lost, confidence can take a long time to be won back.

But let’s not dwell on Swiss Re — it wouldn’t be fair — just look at XL’s recent share price performance.

Just as any IPO in 1998 or 1999 with a dotcom in the name could guarantee an extra 50% spike in the first day’s trading, any third-quarter 10-K with the word ‘sub-prime’ in it can almost guarantee a percentage windfall for the plucky short-seller prepared to take a punt.

Strangely deflated is how we feel — but that is also the right way to be feeling.

As Baloo the bear would have put it:

“When you pick a pawpaw or a prickly pear, if you prick a raw paw, then next time beware”

Normal service will undoubtedly be resumed when everyone remembers to use ‘the claw’ (also know in reinsurance circles as a bargepole) next time!

Have I given you a clue? You better believe it!

Post a comment

(If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)

"Welcome to the reinsurance industry’s first dedicated blog!
This is your chance to tell me exactly
what you think of my opinions and voice your thoughts on the issues driving our industry. Make sure you bookmark my blog today!"
Mark Geoghegan