I also said:
I don’t find the argument that X large insurer did this, so that’s automatically a good approach and we should replicate it. Allianz trades at a little premium to their book value, as do some other large insurers, particularly if they have valuable consumer facing auto / home / health policies with access to consumers directly.
They also hold a large amount of real estate and have a large asset management business. So, it’s not obvious to me that you can say that Nexus Mutual is in a similar position to Allianz, and that we should just copy what they are doing.
Clearly, they believe that their business is undervalued, or, they are just treating this as an efficient way to distribute excess capital beyond their typical dividend.
Fairly confident that you’ve made comments before asking whether the mutual should dissolve, which would mean releasing capital at book value. You can’t have it both ways, you can’t say that the mutual should dissolve and release capital and that we believe that our true value is greater than book value, and so should buy shares above book.
By making the argument that we should be releasing capital, in any form at all, you’re making the argument that the mutual cannot use the capital more efficiently in the business, and so should instead release it back to investors. If that’s the case, given how small our outstanding exposure is, how can you simultaneously believe that we should say true value is above book value? What insurer with less than $200m in exposure is worth more than book value, when it’s not printed massive YoY growth?
It’s pretty obvious to me personally that the fair true value of Nexus Mutual right now is not significantly above book value. If and when we begin to grow our exposure and increase profitability, that true value should rise by accruing profits and driving book value up. But also, by deserving a premium to book value, because we’ve shown strong growth that justifies paying above book. At which point, if you can predict strong profitable growth going forwards, you can make an argument that we should programatically be buying tokens above current book value. But we are not there today.
To be clear, because I’m anticipating that this will be spun, I’m not suggesting that the value of Nexus Mutual today is ONLY the assets we hold. I’m suggesting that it’s not significantly above that, to the point where we should permanently introduce a tokenomics system which will blindly buyback tokens far above book value, when there are countless other factors that should dictate whether this is a good idea or not.
Once your system is in place, we would need to believe that there is not ever a situation where the mutual should only ever be valued as a function of outstanding cover, which seems obviously to be untrue. Your argument is that book value cannot be used solely to decide whether to buy tokens at a value, but instead, your system uses only cover outstanding to decide…
Imagine a scenario where the market is aware that enormous claims are upcoming, but they are not yet filed. In which case, the true value of the protocol should likely be below the book value at that time, as in this example there’s a belief that 20-30% of the assets will actually be paid out in claims shortly, and then revenue will also drop because with less assets our other policies must shrink. Clearly, just using cover outstanding to programatically buy back tokens from the market here is horrible. Not only do we take a big loss on the claims, but we double down by then buying tokens from the market programatically at an excess value. Whereas a rationale operator would halt any buybacks at that point, reassess based on the new asset value and cover sales post-claims, and decide what the new value for buybacks should be.
Rei’s system has a similar flaw, but has the benefit of having a ratcheting system which goes down. So, when the market incorporates this information into wNXM, sells will come direct to Nexus Mutual, and the price ratchets down to reflect the sell pressure so that we aren’t paying so much in excess of the new perceived “true value”.
Should also note I didn’t say that every insurer trades at or below book. I said that book value drives the market cap, which is broadly true. Depending on niche you might find that property insurers are closer to 2-2.5 P/B, while life insurers very often less than 0.8 P/B. That’s a function of profitability, growing market segments and less efficient policy pricing.
Keep in mind, you’re also only look at the largest, most profitable insurers in the industry. Nexus Mutual was unprofitable in 2022 and has 1/10,000 of the assets of Allianz. They are not even remotely comparable.
When you look at more comparable insurers, P/B is a better measure.
If you’re going to look at one of the most profitable insurers, with diversified risks, an extremely strong brand, a real estate and AM business and a unique access to customers, no, P/B is not a measure that you can rely very strongly on for whether to do a buyback or not.
Your suggested system is completely blind to the factors which would dictate whether an insurer should be valued at a premium to book value, yet it automates issuing of new tokens and buyback of existing tokens. Instead, Rei’s system which automates this but only at around book value prevents this system from taking massively suboptimal actions.
If we wish to do larger buybacks, above book value, we can do that manually via vote if and when we choose.
In our current position, we can likely execute fairly significant buybacks purely one-off, by buying wNXM on the market. There is no need to incorporate this directly into the tokenomics, which will exist for years going forward. We are on the same page with regards to doing a buyback right now. Yes, we should do that, at the right price, which is the current wNXM market price. I disagree that this needs to be programatically forced into the tokenomics, because under many scenarios it becomes net negative.
I’m anticipating that your response to this will spinoff into whether the mutual should dissolve or not. If it does, I’d kindly request that you do that in a separate thread. Your post here is about whether we should use your proposed tokenomics, let’s keep it focused on that only.