Property Reinsurers: The Answer Is Blowing in the Wind

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.)

Source: Yahoo Finance, Bloomberg

If I were looking to move tomorrow, I would consider IPC (IPCR), Flagstone (FSR), and Validus (VR) among the “pure play” property reinsurers. Among the diversified players, I would consider PartnerRe (PRE), Endurance (ENH), Allied World (AWH), and Aspen (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

Comments

[buyitcheap:]

These are trading at tempting values - perhaps scaling into some of these every three weeks or so depending on what storms are coming out of Africa is a smart way to enter.

2008 Aug 26 12:18 PM

[whidbey:]

Good idea, I am bleeding to death in BRK and we could use a little violence to stir things up in the reinsurance business. I am just a little miffed at Warren in this down turn, he does not seem to know where the land mines are buried, or how to defuse them. This idea could be just what I need. Thanks for the pick up. Z

2008 Aug 26 02:11 PM

[fxtrader07:]

actually, one must hope for one or two strong hurricane seasons to get all the hot and dumb capital out of the reinsurance business that is driving down premiums to below reasonable rates.
A good hurricane or two with some staggering insurance claims to be paod would be welcome for the years ahead, imho

2008 Aug 27 06:26 AM

[User 232593:]

what craziness.hoping for violent hurricanes to make a few $.this is whats killing this once great nation.why not hope for a huge asteroid hitting about the middle of the u.s. so the whole country could be destroyed & new beginning could start clean?

2008 Aug 27 10:40 AM

[buyitcheap:]

User232953, come on - look at the great opportunity in oil and Louisiana real estate created by Katrina - now that was a trade! :-) (I'm kidding.) but I do agree with FXtrader.

2008 Aug 27 10:46 AM

[Urbane Gori...:]

Seems I saw a spreadsheet study that stated that buying insurers after they were beaten to death as a result of heavy storm damage resulted in positive returns. Apparently the heavy losses caused long term holders to bail out and after the season insurers raised their rates. The stocks then gained favor again.

Having said that, as a 21 year veteran of the Insurance claims business, the gulf States are very litigenous and these cases and Insurance Commissioner hearings can drag out for years. It's impossible to say which way the courts and Commissioners will lean. And penalties can be heavy.

The other issue is to confirm that the company you are interested in is adequately 're-insured' otherwise they have to cannibalize themselves to pay the losses.

jegan ;-)

2008 Aug 27 12:34 PM

[bsharvy:]

I've looked at ENH a bit--about 50% of its investment portfolio is mortgage-backed securities. Not sure how much of that is guaranteed by Freddie/Fannie, or what that guarantee is worth nowadays. There is more to low valuations than meets than eye.

Also, catostrophes aren't necessarily bad for insurers, as they are usually able to raise premiums as a result.

2008 Aug 28 01:40 AM