Who Is Insuring the Insurers?
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With the memory of Hurricane Sandy still fresh for many of those affected by last October’s tropical storm, insurance claims continue to roll in for those seeking reprieve for damages. While a largely negative event for insurance companies, most do not assume all of these risks and are able to pass on a significant amount to a secondary sector, known as the reinsurance industry. Reinsurers exist to help spread risk over multiple parties and thus better absorb the financial setbacks of unforeseen events. One of the most preeminent reinsurance players is Warren Buffett, and his interests have swelled into the billions of dollars, primarily through his Berkshire Hathaway holdings that include GEICO and General Re. (Read more about one of his reinsurance holdings that is currently in hot water.)
The types of reinsurance vary across providers and depend heavily on the primary insurers they service. The size of liabilities, unforeseen events (i.e. weather-related), and solvency issues can create varying risk profiles and potential dips for buy-and-hold investors. However, buying opportunities exist in this sector, whose price-to book ratios have typically been seen above 1.00. We have compiled a list of five reinsurers that compete in the same spaces and have similar market capitalizations of $4-6 billion:
Everest Re Group (NYSE: RE) maintains operations primarily in the life, property, and casualty insurance. Investors who bought in this time last year netted the most impressive gain amongst the stocks in our list, garnering over 33%. Despite suffering a $12 loss during Sandy, RE has recovered to trade near 52-week highs. This shouldn’t deter value buyers however; Everest has both the highest EPS and lowest PEG ratio of our group, which we see as a strong indicator of further upside potential. Sell-side analysts agree, with the majority advocating both accumulation and holding.
A second player is PartnerRe (NYSE: PRE), a $5.8bn company who also has room to grow relative to their book value. Quarterly revenue grew almost 10% over the same quarter in 2011, and similar to Everest Re, the stock is trading near yearly highs. Dallas-based hedge fund manager Clint Carlson has over $16mm employed in PRE. Consensus estimates hint that the current price per share is the most aggressive of the group, supported by a high forward P/E and near parity of current price and analyst targets. Despite this, PRE gains a few notches in attractiveness as a buy-and-hold due to its high dividend yield.
With operations in both insurance and reinsurance, Axis Capital Holdings (NYSE: AXS) saw the smallest year-over-year quarterly revenue growth, possibly in part due to their exposure to both sectors. Earnings came in at huge surprise last quarter, with a beat of over 60%, but current estimates for the last period due out February 4th point to negative earnings. Billionaire Ken Griffin of Citadel fame cut his position in more than half leading up to his last 13F filing in September of 2012.
RenaissanceRe Holdings (NYSE: RNR) writes primarily property catastrophe reinsurance, which means a higher susceptibility to nature-related events. Their price-to-book is the highest of our five spotlighted reinsurers, trading at 1.22. RNR stands as the weakest growth opportunity, and while bias on the Street has a positive slant, more analysts are recommending to hold versus buy.
The $4.1bn Reinsurance Group of America (NYSE: RGA) finishes out our list, with the smallest price-to-book and price relative to projected earnings. RGA’s stock made new yearly lows afterSandy but has been on the mend since. Despite that drop, RGA stands out as our most attractive undervalued reinsurer play, potentially racking up double-digit returns on its way to achieving analysts’ mean price target of $64.59 a year out. It could mean holding through a rocky ride however -- RGA missed earnings two times out of four last year (including a 27% miss in October).
This article is written by Eric Winter and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!