Relative to P&C insurers, reinsurance companies still aren’t getting all that much love, and that’s certainly the case for RenaissanceRe (RNR) (“RenRe”), as these shares have fallen around 5% or so since my last update, meaningfully underperforming the 10% or so gains in the P&C sector. I don’t believe the underperformance is really due to specific execution problems with RenRe, but rather a more general concern that the returns in the broader property catastrophe (or prop-cat) market are inevitably going to head lower over due to excess capital chasing business and pushing down returns.
I don’t disagree with the basic idea that prop-cat is an increasingly less attractive business. Still, when it comes to RenRe, I think that overlooks the opportunities that management has to generate fee revenue from managing third-party vehicles (basically managing some of that excess capital, for a fee) and to generate better returns from a growing non-cat and casualty & specialty reinsurance business. If RenRe can grow future core earnings at a roughly 4.5% rate, the shares still looking meaningfully undervalued today.
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