I have written previously about investing in reinsurance companies, as well as periodic updates of price to book values and combined ratio following quarterly earnings season. U.S. and Bermuda reinsurance companies will soon report financial results for FY13 Q1. I wanted to present the FY12 Q4 spreadsheet with recent stock prices, to show the price to book value based on the most recent public book values reported a few months ago. For review, the two major metrics I track are combined ratio and price to book value. In my screening, I look for the best balance between low price to book and consistently low combined ratios.
The first quarter was apparently one without major catastrophes. I anticipate that this is already reflected in the price run up within this sector. Recall that the fourth quarter included Hurricane Sandy. Overall the industry sustained very little hit from that, at least as judged by stock price activity. On the quarterly calls, we will probably get more clarity on loss estimates now that more claims data will be available from Sandy, compared to the last quarter's conference calls.
|company||current price||Q4 BV||Q4 P/B||Q4 Combined Ratio||market cap (B)||% of 52wk hi|
|Aspen Insurance Holdings (AHL)||$38.55||40.7||95%||108%||2.70||99%|
|Axis Capital Holdings (AXS)||$41.75||43||97%||112%||5.10||99%|
|Endurance Specialty (ENH)||$47.77||52.9||90%||119%||2.06||99%|
|Montpelier Re Holdings (MRH)||$26.11||26.1||100%||116%||1.43||99%|
|Partner Re (PRE)||$91.81||101||91%||95%||5.36||97%|
|Platinum Underwriter (PTP)||$55.82||57.9||96%||25%||1.83||99%|
|Everest Re (RE)||$128.09||131||98%||108%||6.55||97%|
|Validus Holdings (VR)||$37.59||35.2||107%||123%||4.04||99%|
|XL Group plc (XL)||$30.81||33.4||92%||104%||9.09||100%|
Table 1. 2012 4th Quarter reports for selected reinsurance companies, based on updated share prices, as of April 3, 2013.
A few comments on the above table. First, most stocks are at, or near, 52-week highs. Accordingly, the price to book ratios are all near 100%, with several even higher. Knowing the history of this group, I usually favor buying after the fear associated with a catastrophe-related dip. Usually, there are one or more of these every few years. This group overall has been on a rampage with only a minor setback from Hurricane Sandy. While there have been some price increases, my feeling is that there is still excessive underwriting capacity and that the bulls who are dreaming of a hard market (higher reinsurance prices) may be a little early to the party.
Combined ratios for a single quarter are not very useful, although they do show relative recent performance compared to peers. A analysis of combined ratios to assess underwriting skill would be to track these over many quarters, and compare those trends among the peer group.
Similar to what I wrote last quarter, it is hard to find much value in this sector lately, at least by recent standards. Before the financial collapse of 2008, the sector did trade over book value, and that is finally starting to happen again.
Two things could knock this sector back down: large catastrophes, or another economic downturn. Note that Europe seems poised for slower growth, and that is a major market for these companies. Even if the U.S. did not have a simultaneous downturn, these companies can still be hurt.
Partner Re remains one of the only companies currently trading at less than 100% of price to (fourth quarter) book value, although it may have increased European exposure relative to its peers. XL Group also looks favorable from price-to-book, but it may have some overhang from its near collapse back in 2008.
Keep in mind book values will be updated soon with the new quarterly results. The current numbers are stale, as the numbers are only released quarterly, so book values become least accurate right before the next quarter BV gets announced, which is where we are right now - perhaps that creates an opportunity if one is willing to gamble a bit.
Good luck, and thanks for reading!