Reinsurance Update: Updated Book Values For FY12 Q4

Includes: AHL, AXS, ENH, PRE, PTP, VR
by: Brian Abbott

U.S. and Bermuda reinsurance companies have reported financial results for FY12 Q4. I have combed through the SEC filings and press releases and updated my tracking spreadsheet. 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. Also, there are several companies that consistently trade at price to book of over 120% and I have excluded these from my universe of tracked stocks (Renaissance Re (NYSE:RNR) and Arch Capital Group (NASDAQ:ACGL) for those who are interested). I restrict my purchases to companies that trade below book value, as these have been the richest area for takeovers and also it is a form of leverage to buy bond portfolios and reinsurance operations at below book value. Also, all companies in this sector are trading within 3% of their 52-week high - a little too rich for my taste. In my experience, there is always some kind of catastrophe around the corner and I don't like buying this sector at the top.

Combined ratios

The major catastrophe-related loss for Q4 was Hurricane Sandy, and most companies posted a loss for the quarter as a result of related losses. For brief review, underwriting losses are for the most part indicated by a combined ratio of higher than 100%. On my tracking spreadsheet below, I show Q4 and Q3 combined ratios so you can see how these companies performed in a more typical quarter like Q3 without multi-billion catastrophes.

Book value, and share buyback programs

Not surprising for a quarter with a major catastrophe is that quarterly book values took a negative hit. Despite this, year-over-year book values are tracking 10 to 20% higher for the group. Most company calls indicate they are still waiting for the market to harden (which would indicate pricing improvement), but most companies are buying back shares, which is accretive to earnings and book value for the companies trading below book value. I am glad the companies are remaining disciplined and buying back shares rather than underwrite underpriced policies with excess capacity. (If price to book keeps increasing to 100% and above, this will make buybacks less attractive however).

2012 2012 2012 2012
company current price Q4 BV Q4 P/B Q4 Combined Ratio Q3 Combined Ratio market cap (NYSE:B) % of 52wk hi
Aspen Insurance Holdings (NYSE:AHL) $35.43 40.7 87% 108% 87% 2.51 98%
Axis Capital Holdings (NYSE:AXS) $40.30 43 94% 112% 85% 4.75 100%
Endurance Specialty (NYSE:ENH) $43.92 52.9 83% 119% 100% 1.90 99%
Montpelier Re Holdings (NYSE:MRH) $25.10 26.1 96% 116% 73% 1.39 99%
Partner Re (NYSE:PRE) $88.76 101 88% 95% 81% 5.23 97%
Platinum Underwriter (NYSE:PTP) $50.36 57.9 87% 25% 61% 1.65 97%
Everest Re (NYSE:RE) $119.24 131 91% 108% 87% 6.13 99%
Validus Holdings (NYSE:VR) $36.59 35.2 104% 123% 70% 3.95 97%
XL Group plc (NYSE:XL) $28.24 33.4 85% 104% 92% 8.44 98%

Table 1. 2012 4th Quarter reports for selected reinsurance companies.

Investing Thesis

Based on my stated thesis of buying below book value and with the most consistently low combined ratio, my plan is to purchase Partner Re as a new position during the next downdraft. It is one of only two companies in this sector that had combined ratio in the profitable range during Q4 - indicating disciplined and diversified underwriting that did not overexpose them to Hurricane Sandy.

The other "buy" candidate is Platinum Underwriters with a combined ratio of 25% for the quarter and 61% the prior quarter. Both companies trade at 87-88% of book value, which is surprisingly below the level of other companies, especially considering the superior underwriting profitability of these two.

A few I am not buying include XL Group (bad residual feelings about this company following the 2008 debacle, including a near bankruptcy), and Endurance Specialty Holdings and Aspen. I hold the latter two and do not wish to increase my position sizes. (If I didn't already own AHL and ENH, I would consider buying new positions however, as they still look like decent values, despite their immense recent increases). Validus Holdings and Axis Capital are two that look fully valued and I already hold, and may look to sell if price to book hits 110%

Thanks for reading and commenting, and I hope to post another update following Q1 earnings releases in 3 months.

Disclosure: I am long AHL, VR, ENH, PTP, PRE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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