The answer, my friend, is blowing in the wind...
That said, my question is: Do I buy the property reinsurers here? My initial guess is yes, because it has been a weak hurricane season so far, and the beginning and end of the seasons tend to be correlated. But it is too early to take action. What I am more likely to do is wait until my next reshaping at the end of September, and make some shifts then. Perhaps Gustav and some other hurricanes will prove my thesis wrong by then.
So, how are valuations for the reinsurers? Cheap, but pricing is weak, because capital is plentiful. (Click chart to enlarge.)
If I were looking to move tomorrow, I would consider IPC (IPCR), Flagstone (FSR), and Validus (NYSE:VR) among the “pure play” property reinsurers. Among the diversified players, I would consider PartnerRe (NYSE:PRE), Endurance (NYSE:ENH), Allied World (NYSE:AWH), and Aspen (NYSE:AHL). Note that the book value of PartnerRe is understated because they don’t discount their loss reserves. For conservative players, PartnerRe is compelling because of their strong balance sheet, very diversified book of business, and strong management. PartnerRe, Endurance, Flagstone, IPC and Allied World score some extra points in my book because of their conservative cultures.
I’m not doing this trade tomorrow, but with good weather, and continued pessimism over financials, this trade could look very good near the end of September.
Disclosure: no positions