RenaissanceRe's High-Quality Model Serving It (And Investors) Well

Hard times tell you a lot about companies, and the combination of a very soft pricing market and recent catastrophe losses have highlighted a lot of what is good about RenaissanceRe (NYSE:RNR). While the shares have certainly lagged the S&P 500 over the past year, and lagged rival/peer Arch Capital (NASDAQ:ACGL), RenRe hasn't done poorly relative to other insurers like Everest Re (NYSE:RE), Aspen (NYSE:AHL), or Validus (NYSE:VR). Throughout this tough period, RenRe's underwriting standards, strong balance sheet, and business flexibility have served the company well, despite some erosion in underwriting profitability.

RenRe is trading at a premium relative to long-term valuation norms. Some of that can be attributed to what I believe is a legitimate and well-earned quality premium, but I do have some worries that investors have been too eager to factor in the benefits of harder insurance markets. While I do still see some upside for shareholders from here, I'd be cautious about establishing a big new position at these levels.

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RenaissanceRe's High-Quality Model Serving It (And Investors) Well

Seeking Alpha: Everest Re Leaning Into The Wind

Even in the face of persistent double-digit declines in prop-cat reinsurance rates, Everest Re (NYSE:RE) shares have managed to gain another 13% since late September, outperforming rivals like Validus (NYSE:VR), RenRe (NYSE:RNR), Aspen (NYSE:AHL) and Endurance (NYSE:ENH). Investors remain concerned about the long-term returns on the business being written in the sector today, but Everest Re has continued to grow premiums at a strong rate and to report low combined ratios and solid underwriting profits.

There is a risk that the old rules about the reinsurance cycle no longer apply and that companies like Everest Re are looking at a prolonged stretch of single-digit ROEs that will fall below required returns. For its part, management believes they still have the opportunity to write attractive business and control risk, while also looking for growth in the primary insurance market. There is a considerably wider spread between best-case, base-case, and worst-case scenarios for reinsurers like Everest Re today than life insurers, P&C insurers, or mixed operations like Aspen. That said, if you believe that the company can generate long-term ROEs of 11% or higher, there is still upside here.


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Everest Re Leaning Into The Wind

Seeking Alpha: Argo Group Coming Along, But The Going's Tougher

Argo Group (NASDAQ:AGII) is taking a page from Aspen's (NYSE:AHL) book; trying to leverage strong core underwriting across a somewhat disjointed and sub-scale collection of operations. So far, it hasn't been a bad plan as the company has seen its shares climb more than 100% over the past three years, outdistancing larger players like Aspen, Allied World (NYSE:AWH), ACE (NYSE:ACE), and W. R. Berkley (NYSE:WRB) by rather healthy margins.

I am starting to wonder, though, if it is going to get harder for Argo to continue its path toward higher returns. The excess and surplus, specialty, and reinsurance markets have gotten a lot more challenging of late, with companies finding it more and more difficult to push higher rates - an important part of Argo's drive to write more profitable business upon renewal. I do still think that Argo can get its adjusted ROE above 10% over the next five years, and there is about $5/share of upside for every 1% improvement to long-term ROE, but the roughly 17% move since my last update has captured a lot of the undervaluation that I saw at the time.

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Argo Group Coming Along, But The Going's Tougher

Seeking Alpha: Allied World Offers A Healthy Balance Sheet, But Market Conditions Are Tough

Allied World Assurance (NYSE:AWH) has done pretty well since last I wrote about this small specialty insurance company. The shares have risen more than 20% since that late April 2014 article, basically matching fellow specialty underwriter W.R. Berkley (NYSE:WRB) and surpassing the likes of Arch Capital (NASDAQ:ACGL), ACE (NYSE:ACE), and Aspen (NYSE:AHL) that have all seen sub-10% returns over that time.

Every insurance story offers its own little twists. Arch Capital is looking to grow its mortgage insurance business, while ACE is looking to overseas markets and Aspen is looking forward to achieving the benefits of scale as numerous relatively new business lines reach scale. For Allied World, there would still seem to be many attractive market entry/share expansion opportunities (even as rates weaken) and the company's balance sheet appears to be in very good shape.

I do have some concerns that the business that Allied World is writing today won't be as profitable as the business it wrote over the last few years and the sizable reserve releases will start to shrink, but that's a common industry concern now. That said, I like the company's leverage to specialty lines and overseas markets and the shares do look undervalued now.

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Allied World Offers A Healthy Balance Sheet, But Market Conditions Are Tough

Seeking Alpha: Endurance Specialty Still Undergoing Substantial Shifts

Endurance Specialty Holdings (ENH) hasn't quite settled into its new normal yet, which makes quarter-to-quarter forecasting quite a bit more challenging. Expenses are still running high, but premium growth in the insurance business should lead to better leverage down the road. Still, there is a lot of uncertainty about the long-term profitability of business being written today in the insurance sector, and Endurance's pursuit of Aspen (AHL) adds yet another layer of uncertainty. I seem to be a little more bullish than most sell-side analysts on Endurance's long-term profitability, as an assumption of a five-year ROE of 10% leads to a fair value estimate above $58.

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Endurance Specialty Still Undergoing Substantial Shifts

Seeking Alpha: It's Hard To See How W.R. Berkley Gets A Higher Multiple From Here

When investors look at high-quality insurance names like Arch Capital (ACGL), RenRe (RNR), and W.R. Berkley (WRB), they shouldn't expect to find big bargains very often. These companies have all shown themselves to be quite adapt at pricing risk, allocating capital, and maneuvering themselves into lines of business that can maximize their returns, and the Street is typically happy to pay for that quality and consistency.

While I don't expect to pick up W.R. Berkley on the cheap, I'm worried that the valuation on this specialty insurer has overshot the mark. Berkley's management may be right that weak underwriting profitability across the sector will serve as a tailwind for rate increases, but I'm concerned that the influx of competition and capital into specialty insurance could create some limits. At the same time, I'm a little nervous about company's reserves and the large amount of leverage put to work here. W.R. Berkley has been a top-notch performer for years and management deserves the benefit of the doubt. Even so, I'm not going to pay up to this extent to own the shares.

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It's Hard To See How W.R. Berkley Gets A Higher Multiple From Here

Investopedia: Autodesk A Little Undervalued, But Uncertainty Is Rising

It's interesting to see which excuses the Street willingly accepts when a company is struggling with guidance. In the case of Autodesk (Nasdaq:ADSK), the Street isn't too bothered by another round of lower guidance and ongoing economic uncertainties. Instead, investors seem excited about the potential of a more pronounced transition to a SaaS model. Although I think the Street may be a little too optimistic on that point, the shares do look a little undervalued and remain a volatile software play leveraged to improving economic activity.

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Investopedia: Aspen Doesn't Really Stand Out

With so many stories out there in the insurance sector--from turnarounds or restructurings like Hartford (NYSE:HIG) and XL Group (NYSE:XL) to well-run operations like Allied World (NYSE:AWH) and RenRe (NYSE:RNR)--investors have plenty of choices and a lot of undervalued stocks to consider. Unfortunately, Aspen (NYSE:AHL) really doesn't stand out in any particular regard. While this company has a reasonable record of returning cash to shareholders, and the move towards writing more insurance business makes sense, neither the strategy nor the valuation are exceptional today.

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