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Investment Manager D.E. Shaw Set to Acquire Specialty Insurer James River

June 11, 2007

Global investment manager D. E. Shaw group has organized a Bermuda-based holding company to acquire James River Group, Inc. a North Carolina-based excess and surplus and workers' compensation insurer, in a transaction with a total equity value of approximately $575 million.

 I have been constructive on P&C shares generally. Think about it: You are an insurance company, you have set rates based on the probability of loss times the magnitude of the loss across your insured base. Along comes a big hurricane and you take the big loss.

Unless the calculation of probability of loss times the magnitude of loss increases, your rates should stay the same. Instead, rates along the Gulf Coast have gone through the roof — doubled, tripled, or more.

Were the insurance companies really that far off in their calculations pre-Katrina? Or is there an inefficiency in the market such that they have been able to raise rates due to limited competition in the heavily regulated industry, magnified by state insurance commissions willing to go along with the rising rates due to Gore-inspired panic?


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