Today's insight article will reflect on the value of investing with one of a group of reinsurance organizations, White Mountains Insurance (NYSE:WTM), Aon PLC (NYSE:AON), Swiss Re AG (OTCPK:SSREY), Validus (NYSE:VR), and Maiden Holdings (NASDAQ:MHLD).
First we should define the reinsurance market.
Property catastrophe reinsurance covers insurance companies' exposures to an accumulation of property and related losses from separate policies, typically relating to natural disasters or other catastrophic events. Property catastrophe reinsurance is written on an excess-of-loss basis, which provides coverage to primary insurance companies when aggregate claims and claim expenses from a single occurrence from a covered peril exceed a certain amount specified in a particular contract.
The reinsurance market is cyclical and highly competitive with many companies in the U.S., Europe and Bermuda competing for business. Underwriting results also tend to fluctuate from year to year depending on how "soft" or "firm" premium rates are and on the level of incurred losses. While most carriers compete on the basis of price many also compete on the basis of financial strength, capacity to underwrite, and claims service.
This recent news article from Reuters provides a snapshot of current industry conditions.
Re-insurers mull response to growing competition
10:45 AM ET, 09/06/2013 - Reuters
By Chris Vellacott and Jonathan Gould
LONDON/FRANKFURT, Sept 6 (Reuters) - Reinsurance executives gathering for their annual get-together in Monte Carlo this weekend will be considering their response to increasingly popular alternative insurance-linked investments that are driving down prices in the industry.
Investment funds looking for higher yields in a low-interest rate environment have funneled billions of dollars in recent years into so-called "catastrophe bonds", which are sold by insurers to share the risk they take on for natural disasters.
Re-insurers, whose business is to help shoulder the risks faced by insurers in exchange for part of the profit, have seen their pricing power diminish and their relevance threatened.
The competition is blamed for pushing reinsurance prices down by more than a fifth in the lucrative market for hurricane coverage in the United States when contracts there were renewed in June and July.
That downward pressure may spill over into other lines of business when re-insurers and their insurance company clients renew a further round of contracts on January 1, brokers said.
James Vickers, chairman of broker Willis Re International, said price pressures will lead some re-insurers to shift their attention to specialty areas like marine or aerospace insurance, while others may opt to return excess cash to shareholders if prices are too low.
"The redeployment of capital that may not be used in U.S. catastrophe business is the most interesting conundrum," Vickers said.
The world's biggest reinsurer, Munich Re, has already said it is considering buying back its own shares, while No. 2 player Swiss Re has said its "first priority" is growing its dividend.
Credit rating agency Standard & Poor's calculates that the reinsurance sector held $34 billion in excess capital last year.
As long as interest rates stay low, investors in alternative insurance products like catastrophe bonds look set to keep gnawing away at the profitability of traditional re-insurers.
Around $10 billion of new capital flowed into insurance-related investment structures over the last 18 months, with the total market now worth around $45 billion, reinsurance broker Guy Carpenter estimates.
Despite the challenges, credit rating agency Moody's gave an upbeat assessment of re-insurers at a briefing in London, arguing that most firms have embraced the new environment.
"While a continued inflow of alternative capital has the potential to alter the core business model of re-insurers, many firms in the sector have been preparing for this eventuality for years," said James Eck, a senior credit officer at Moody's
But rival S&P, also in a London briefing ahead of the Monte Carlo gathering, said there was a risk to the long-term survival of many re-insurers.
"Re-insurers who aren't willing to adapt or try and stay ahead of the curve are going to be pushed to the sidelines or pushed out," said Dennis Sugrue, a reinsurance specialist at S&P.
There could be a wave of consolidations in the industry, particularly among smaller operators, Sugrue said.
But many re-insurers are clearly trying to ride the wave of alternative insurance investing, taking advantage of their own specialist understanding of risk to not only buy the bonds for their own portfolios but to advise others, too.
"Most re-insurers need and are beginning to develop some sort of third-party fund management capability," said Willis Re's Vickers.
Here is a brief insight in the featured companies' business models.
White Mountains Insurance Group, Ltd. conducts its businesses through its property and casualty insurance and reinsurance subsidiaries. White Mountains focuses on four business principles, the annual report lists these principles as Underwriting Comes First, Maintain a Disciplined Balance Sheet, Invest for Total Return, and Think Like Owners.
Aon plc is a global provider of risk management services, insurance and reinsurance brokerage, and human resource consulting and outsourcing, delivering distinctive client value via risk management and workforce productivity solutions. On April 2, 2012, the Company completed the reorganization of the corporate structure of the group of companies pursuant to which Aon Corporation merged with one of its indirect wholly owned subsidiaries and Aon plc became the parent company of the Aon group. AON has become a major player this year through its human resources consulting with major corporations considering their approach to Obamacare. And as a result AON may benefit as enrollment increases in the health insurance exchange marketplace.
Swiss Re AG is a Switzerland-based holding company of Swiss Re Group. It diversifies its activities into Property & Casualty, offering traditional reinsurance and insurance products for corporate clients, Life & Health, offering reinsurance to life insurance companies worldwide and acquires closed life and health books of business which it administers through Admin Re and Asset Management (included in other business segments), engaged it's management of the assets that the Group generates and setting of the Group's investment strategy.
Swiss Re is a global operator, with over 60 offices in more than 20 countries. Swiss Re has a superior capital rating and 150 years of experience. This track record of claims payments provides a preferential access to long tail business, such as Casualty.
According to the Swiss Re annual report alternative capital increases competition and capacity, but does not challenge Swiss Re's business model. Swiss Re is a knowledge company with permanent contact to and a deep understanding of our clients throughout the entire organisation. Through our differentiation of products and services, Swiss Re creates more value for clients and generates additional profitable business.
Validus Holdings, Ltd. is a holding company. The company, through its subsidiaries, provides reinsurance coverage in the property, marine and specialty lines markets and insurance coverage in the same markets. Principal operating objective is to use capital efficiently by underwriting primarily short-tail insurance and reinsurance contracts with superior risk and return characteristics. Risks are managed through a variety of means, including contract terms, portfolio selection, diversification criteria, including geographic diversification criteria, and proprietary and commercially available third-party vendor catastrophe models. Validus recently formed a Swiss underwriting company, transforming the existing operations of Flagstone Reassurance Suisse S.A. (the "company"). A Swiss presence is another step in the evolution of Validus to develop our global underwriting platform.
Maiden Holdings, Ltd. is a Bermuda-based holding company primarily focused on serving the needs of regional and specialty insurers in the United States and Europe by providing reinsurance solutions designed to support their capital needs. The Company provides customized reinsurance solutions internationally to clients in support of programs it designs and implements for original equipment automobile manufacturers (OEMs). MHLD focus is on non-catastrophe working layer financial needs of targeted US and European regional and specialty insurers - Low volatility and predictable business model.
Financial Metrics and Considerations for Portfolio Investment
52 Week Price Range
$505.20 - $615.88
$51.78 - $76.30
$67.90 - $86.60
$33.11 - $40.07
$8.10 - $13.46
Net Profit Margin
Return on Equity
Return on Assets
Earnings per Share
The Portfolio goals first are for Dividend and Growth; with a preferred Dividend of 3%. This first goal would narrow the group to include SSREY-4.34%, VR-3.07%, and MHLD-3.10%.
Net Profit Margin leaders again includes, SSREY and VR.
Earnings and Price/Earnings leader narrows the field further to SSREY.
There is a lot to like about Swiss Re, the long 160 history, the place in the global market, and the asset management investment strategy.
As a result then SSREY now becomes a likely candidate to be added in my portfolio. But as the year end approaches and rebalancing decisions are made with an eye toward income we will see.
Disclaimer: These are only personal opinions and all readers should do their own research. Readers are accountable for investment decisions and trades.