RenaissanceRe Executing, But The Street Doesn't Care

 

It’s getting harder and harder to see what would change the Street’s mind in a more positive direction where RenaissanceRe (RNR) (“RenRe”) is concerned. I don’t think anybody seriously questions whether this isn’t among the best (if not the best) in the reinsurance business, but it doesn’t seem as though the market wants to give much credit to the value of the company’s 3^rd party business, the efforts to growth the Casualty and Specialty businesses, nor the beneficial impact of upcoming rate increases.

RenRe shares have gone almost nowhere since my last update, nor have they done much over the last five years. It doesn’t take much to drive attractive fair value targets here, and I see nothing concerning in the model as currently constructed, but investors attracted by the apparent potential value here had best be prepared for a long wait for their contrarian call to work out.

 

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RenaissanceRe Executing, But The Street Doesn't Care

RenaissanceRe Still Getting Little Love Despite Better Near-Term Results And A Sound Long-Term Strategy

 

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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RenaissanceRe Still Getting Little Love Despite Better Near-Term Results And A Sound Long-Term Strategy

RenaissanceRe Worth A Look With The Street Down On Prop-Cat Reinsurance

It can be difficult to generate attractive long-term returns investing in insurance stocks, as long-term appreciation is typically tied to book value growth that rarely exceeds the single digits, but if you're willing to zig when others zag, you can do better. That brings me to RenaissanceRe (RNR) - RenRe is still widely regarded as one of the best reinsurance names in the business, probably the best in property catastrophe reinsurance ("prop-cat"), but with the Street down on the prospects for reinsurance, there could be an opportunity here.

To be sure, the reinsurance business is in general a less attractive business that primary P&C (particularly specialty P&C) over the long term, but that doesn't mean there isn't money to be made here, particularly by well-run companies with diverse capabilities. Led by a proven team that is putting a lot of capital into the market today, I believe RenRe is set to outperformance and offers a double-digit prospective annualized return.

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RenaissanceRe Worth A Look With The Street Down On Prop-Cat Reinsurance

RenaissanceRe Continues To Do Things Its Own Way

I really have to admire a company that gets pushed by a long-term shareholder to conduct a strategic review and sale process only to turn around in less than a month and announce a significant acquisition. With RenRe’s (RNR) acquisition of Tokio Millennium Re from Tokio Marine Holdings (OTCPK:TKOMY), management has made it clear that they continue to see more value for shareholders as an independent company and that, like it or not, they’re going to run the company more or less the way they always have.

I’ve been a long-term admirer of RenRe, so I really have no problem with this decision. Although there is still considerable uncertainty in the market over Jan 1 reinsurance renewal pricing, I think RenRe is sitting in a relatively comfortable (if not good) position as a ready and willing supplier of capacity at the right price, and I believe the TMR transaction is a low-risk deal that could offer double-digit accretion as it plays out.

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RenaissanceRe Continues To Do Things Its Own Way

Everest Re Looking A Little Better, But Reinsurance Rates And Loss Trends Still Up For Debate

I thought Everest Re (RE) looked a little too beaten down back in August, largely on outsized worries about management’s ability to asses and price risk, particularly given significant growth in reinsurance underwriting. Since then, the shares have done a little better than most of its peers including Arch Capital (ACGL) and AXIS (AXS), though hasn’t quite kept pace with RenRe (RNR) and the company’s trailing twelve-month performance looks a little better relative to the S&P 500 than it did before.

Four months doesn’t really change all that much, but I do believe the outlook for cat reinsurance pricing is a little better now, and I think Everest Re has laid out a believable case for growth through targeting opportunities in specialty/niche insurance and harder markets in the reinsurance business. Reinsurance pricing is clearly a wildcard, as is the demand for insurance-linked securities (where Everest has a meaningful presence), and I think the company’s estimates for fourth quarter cat losses could skew high, but the shares still look valued attractively enough to consider buying and holding.

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Everest Re Looking A Little Better, But Reinsurance Rates And Loss Trends Still Up For Debate

Arch Capital Reports Another Good, Balanced Quarter

All in all, business continues to go well for Arch Capital (ACGL). The Street seems a little more rational about the company’s mortgage insurance business relative to just a month or two ago, while the insurance business continues to do well relative to an environment with rising claims expense. This wasn’t the sort of result that’s going to change minds on the stock though. If you liked it before, you’ll almost certainly still like it and if you didn’t like it before, I’m sure you’ll work up some justification for that too.

As far as valuation goes, the 15% or so move from recent lows takes it out of “can't miss” territory and more into “decent long-term hold” territory. At this price, I believe investors can expect a high single-digit total annualized return, which isn’t bad from one of the best-run insurance companies out there.

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Arch Capital Reports Another Good, Balanced Quarter

RenaissanceRe's Strong Risk Modeling Comes Through Yet Again

Maybe it sounds obvious, but the ability to adequately model, measure, analyze, and price risk is a major strategic asset for an insurance company, and one that has served RenaissanceRe (RNR) (“RenRe”) and its shareholders very well over the years. That risk management skill came through yet again for the company in the second quarter, with lower loss experiences from last year’s natural disasters leading to a big reserve release this quarter.

I don’t expect another reserve release like this again in the near future, and the fundamental problem of weak pricing in reinsurance remains (particularly in cat-exposed business). RenRe has been harnessing its fundamental skills to expand its casualty and specialty businesses, where the risks are often harder to model, the needs of customers are much less “off the rack,” and where good pricing is still available.

With the shares having sold off since my last piece (even with a sector-wide rebound off late June lows), the valuation is a little more interesting – RenRe isn’t exactly dirt cheap, but the shares are trading below my assessment of fair value, and buying well-run companies below their fundamental value usually has a way of working out.

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RenaissanceRe's Strong Risk Modeling Comes Through Yet Again

Arch Capital Sticking To Its Guns, But The Street's Unimpressed

You might think that a company with a long track record of strong results would get more benefit of the doubt, but the Street just doesn’t seem to want to buy the Arch Capital (ACGL) story, or its shares. Although the housing market is strong and regulatory changes to the mortgage insurance industry would argue for better returns, while the P&C and reinsurance industries struggle with inadequate pricing power, analysts and investors just don’t want to pull the trigger.

I believe there continues to be an attractive long-term opportunity in Arch Capital shares. The heavy weighting of the mortgage insurance business does indeed change the company’s long-term outlook, but that’s not necessarily a bad thing. In the meantime, the company continues to look for ways to generate acceptable returns in its insurance and reinsurance operations, while maintaining long-term flexibility in the pursuit of double-digit ROEs. With the shares undervalued below $30, I still find these shares attractive.

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Arch Capital Sticking To Its Guns, But The Street's Unimpressed

Sluggish Rates And Book Value Growth Limit Renaissance Re's Appeal

I wasn’t overly excited about the prospects for the shares of Renaissance Re (RNR) (“RenRe”) back in the fall of 2017, as I was concerned that renewal rate increases would disappoint even after a bad catastrophe year and that RenRe would be facing a combination of weak book value and ROE performance. RenRe shares have indeed underperformed since then, falling almost 10% since that last article (though outperforming Arch Capital (ACGL) and Lancashire Holdings (OTCPK:LCSHF) (another reinsurance/specialty insurance company with meaningful property exposure)) and slightly more over the past year.

Weak rates have indeed remained the story, and with that weak momentum in book value growth (actual contraction for three straight quarters) and barely double-digit near-term ROE prospects. While RenRe remains a great reinsurance company, with upside in the casualty/specialty business and its third-party capital management vehicles, it’s likely going to take a little longer to unlock that value and investors have to contend with the risk that over-capitalized markets will be the “new normal” for a longer time, keeping a lid on RenRe’s rate growth prospects and returns.

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Sluggish Rates And Book Value Growth Limit Renaissance Re's Appeal

Arch Capital Sliding Back To An Interesting Long-Term Valuation

Although Arch Capital (NASDAQ:ACGL) remains a very well-regarded insurance company, the last year hasn't been so friendly to this company or its peer group. A lot of contributing factors have been at play, including large cat losses in 2017, rising costs, regulatory/competitive changes and so on, pushing the shares down more than 10% and below the performance of peers like Everest Re (NYSE:RE), RenRe (NYSE:RNR), and W.R. Berkley (NYSE:WRB).

When I last wrote about Arch Capital, I said I preferred to wait in the hopes of getting an opportunity to buy the shares in the mid-to-low $80's. That opportunity has arrived, even though analyst estimates have continued to head higher. While these stocks generally don't perform especially well during periods of higher rates (which may seem counter-intuitive given the benefits to their investment income), and pricing power is still limited, I think this may be an opportunity to start a position. Arch Capital looks priced to generate double-digit annual returns from here and this has been one of the best-run insurance companies in the business - a trend I expect to continue, and to continue to benefit shareholders, into the future.

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Arch Capital Sliding Back To An Interesting Long-Term Valuation

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: Renaissance Re Taking A Best-In-Class Model Into Uncharted Territory

Renaissance Re (NYSE:RNR) (or "RenRe") has long been respected as one of the best-run reinsurance companies out there. One that can generate ROEs of 20% to 30% in good years and minimize the damage in the bad years when catastrophic events like hurricanes and earthquakes do hundreds of millions (if not billions) of dollars in damages. RenRe has also been a pioneer in using third-party capital arrangements to generate high-margin fees and commissions while giving it maximal flexibility for its underwriting decisions.

Things are different now. RenRe acquired Platinum in no small part to diversify itself more into casualty reinsurance, and this longer-tail business will shift how RenRe earns its money (more earnings from managing the float) and generates its returns. What is also different is the reinsurance market itself, with third-party capital sources now around 20% of the market and pushing rates down more than 40% from prior peaks. I expect RenRe to continue to be one of the best-run insurance companies in the reinsurance space, but I think it's going to be tough for the company to exceed low double-digit ROEs in the future and that makes it hard to see a lot of value in the shares today.

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Renaissance Re Taking A Best-In-Class Model Into Uncharted Territory

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: RenaissanceRe Changes With The Times

Insurance companies like ACE (NYSE:ACE), Arch Capital (NASDAQ:ACGL), and W.R. Berkley (NYSE:WRB) are successful in no small part because they are structured in a way that management can smoothly reallocate capital across business lines as rates and projected returns dictate. That wasn't historically as much of an option for RenaissanceRe (NYSE:RNR), though, as this very well-run property catastrophe reinsurer didn't have the same level of diversification across its operations.

Having closed the deal on Platinum Underwriters, it's a new era for RenRe. Management can, and is planning to, allocate significantly more capital toward casualty and specialty reinsurance, sidestepping some of the rate pressure in prop-cat. While this move should decrease the volatility of the business over the long term, it will likely also temper some of the advantages of what had been arguably the best prop-cat reinsurer out there. Long-term ROEs are likely to be lower with the new business mix, but RenRe looks like a stronger company for the deal. The one hitch is valuation - as I have complained on several occasions lately, there aren't that many bargains in the insurance space, and while RenRe does seem undervalued, it isn't a compelling bargain.

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RenaissanceRe Changes With The Times

Seeking Alpha: Arch Capital Keeps Going While The Going Gets Tougher

I like MetLife (NYSE:MET), ACE (NYSE:ACE), and W.R. Berkley (NYSE:WRB) quite a bit as insurance companies, but Arch Capital (NASDAQ:ACGL) has long been at the top of my list as a well-run insurance company with an uncanny knack for profitable allocating and reallocating of capital across multiple lines of business. That skill is increasingly valuable as P&C and reinsurance rates continue to fall and the industry looks to be heading into a tough multiyear stretch.

I don't believe that Arch Capital needs to join into the recent upswing in M&A activity, but the company does have the capital to get involved if the right opportunity should show up. Failing that, I expect the company to continue looking to mortgage insurance and selective alternative markets and excess and surplus lines as a source of growth and adequate returns.

Arch Capital has been something of a middle-of-the-road performer over the past year, but it's not yet particularly cheap even with long-range ROE estimates in the low teens. Buying into a part of the cycle where rates are falling, reserves are shrinking, and earnings are likely to come under pressure for many players is a risk on its own and given that backdrop I'd wait in the hopes of being able to buy Arch Capital's shares at a better price down the line.

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Arch Capital Keeps Going While The Going Gets Tougher

Seeking Alpha: Arch Capital Getting Attractive As Its Markets Get Less So

Arch Capital (NASDAQ:ACGL) is often lauded as a well-run insurance and reinsurance company and a good stock to own for those seeking more defensive exposure to insurance. Interestingly, while Arch Capital may be labeled as defensive because of management's disciplined underwriting and strong capital management, Arch Capital's shares have underperformed peers like ACE Limited (NYSE:ACE), RenRe (NYSE:RNR), and XL Group (NYSE:XL) by more than 10% on a year-to-date basis.

I didn't like the valuation all that much six months ago, but down another 5% from then I'm starting to warm up to the stock. I like the potential for Arch to be a share-taker in the mortgage insurance industry, and I expect the company's specialty insurance business to be stickier through this tough pricing cycle than others apparently expect. The reinsurance business is a risk and I do worry about an overall downward shift in valuation and sentiment for insurance stocks, but these shares are starting to look tempting.

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Arch Capital Getting Attractive As Its Markets Get Less So

Seeking Alpha: Is Renaissance Re Still A Safe Haven Among Reinsurance Companies?

I believe there are many standards by which RenaissanceRe Holdings (NYSE:RNR) (or "RenRe") can be called an excellent, if not one of the best, reinsurance companies in the business. Since its founding in 1993, RenRe has generated some of the best returns on equity within the space (a 20%-plus ROE since inception) due to very sophisticated risk analytics and modeling. RenRe has also been one of the pioneers in managed cat vehicles, an alternative capital option that generates significant returns on capital for the company.

The problem is that the property catastrophe market has too much capital today and pricing is getting undisciplined, with underwriters like RenRe and Validus (NYSE:VR) looking for double-digit declines in premiums. Although RenRe has been growing its specialty reinsurance and Lloyds businesses, it's going to be difficult to withstand the pressures in a business that makes up close to 70% of premiums. Although RenRe's shares are still a little undervalued relative to my long-term ROE assumptions, I see better overall opportunities in life insurance.

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Is Renaissance Re Still A Safe Haven Among Reinsurance Companies?

Seeking Alpha: XL Group Plc Is Over-Reserved, But Not That Undervalued

XL Group plc (XL) may have nearly gone out of business during the worst of the credit crisis, but in the time since the company has done a pretty decent job of repairing its capital situation, even if at a high cost in terms of dilution. The bigger question today is whether the company can generate substantially better results for the long-term - while the company looks over-reserved and over-capitalized, the nature of its underwriting may well limit the upside.

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XL Group Plc Is Over-Reserved, But Not That Undervalued

The Motley Fool: A Long-Proven Winner Is Being Underestimated

Strong sector performance has led to a lack of quality insurance companies trading at any meaningful discount to fair value. Property catastrophe reinsurance maven RenaissanceRe (NYSE: RNR  ) , or RenRe, looks like a bit of an exception. Of course, exceptions elicit the question, "What's different here?" In the case of RenRe, it looks like investors are concerned about the acknowledged weakness in catastrophe premiums next year, as well as the possibility that the favorable reserve development well has started running dry.

Next year will almost certainly be a down year for catastrophe reinsurance premiums, but I think investors may be acting a little hastily in assuming that RenRe's growth in specialty and Lloyd's can't cushion the blow. Moreover, I think RenRe, along with Arch Capital (NASDAQ: ACGL  ) and Axis Capital (NYSE: AXS  ) , is in on the very highest level in terms of management quality and underwriting skill. Perhaps it's smarter to wait for the insurance sector as a whole to pull back, but RenRe's relative underperformance makes it more interesting to me these days.

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A Long-Proven Winner Is Being Underestimated

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