With hurricane season kicking into high gear I've been upping my interest in reinsurers. I've written before how reinsurance premiums are currently in a race to the bottom as too much underwriting capacity entered the business after pricing strengthened in the wake of 9/11. The pricing life cycle goes something like this: catastrophe is followed by capacity shakeout is followed by pricing strength is followed by capacity expansion is followed by pricing weakness is followed by catastrophe is followed by capacity shakeout and so on and so on and so on.
I have no idea if the current hurricane season will result in massive claims. But the homework I've done shows me to wait, patiently, until the capacity shakeout occurs. Pricing inevitably firms which gives an earnings lift, and moves the risk/return balance favorably to returns to some very solid names. I've been looking extensively at PartnerRe (NYSE:PRE) and Arch Capital (NASDAQ:ACGL).