Quick Value 11.15.21 ($RNR)
RenaissanceRe - 1.2x book value for a beaten up reinsurance business
Inflation grew more than 6% YoY in the month of October and core CPI (excluding food / energy costs) grew 4.6% YoY
Produce prices grew 8.6% YoY in October indicating similar level of price increases being felt by producers and sellers of products (as opposed to end consumers in the CPI measure)
Prices for most categories are up significantly compared to last year with cars, electricity, insurance, and medical care up more than others.
Here’s another stock that hasn’t done much over the past 5 years with shares mostly flat during that period…
RNR is an insurance company operating in the reinsurance space. They offer insurance to other insurers and reinsurers to provide that 2nd layer of protection. RNR covers things like catastrophes such as earthquakes or hurricanes.
This one caught my eye recently when a handful of executives spent ~$4.4m to buy shares around $145/share — including a $2.1m purchase by the CEO.
Reinsurance is one of those boom-bust cyclical businesses depending on how well the underwriting is done and how significant the natural disasters / catastrophes are in any given year.
We can see that earnings are robust in years with minor catastrophes (2016, 2019) and are negative in years with extreme weather events (2017). And 2021 is shaping up to be another year of large cat losses:
Overall, book value per share — generally the key measure of value in an insurance / financial company — has grown modestly over the years at a ~6% annual rate.
A list of some other reinsurers with market cap, price to book value, and assets to equity (a good proxy for leverage in a financial services company).
Some quick bullets as to why this might be interesting or worth a deeper dive:
Q3 call highlighted several times the need for higher insurance rates industrywide; other companies have confirmed that rates are hardening across the board — this should lead to higher underwriting income in the future
The balance sheet is in good shape — with nearly $1 in equity for every $4 in assets; RNR has a more conservative balance sheet than most competitors
Returning excess capital — they recently announced a buyback program and have signaled that 2022 should see plenty of capital returns to shareholders (barring any major weather events of course)
RNR (and other insurers) may not screen well right now given they have negative earnings and rising price-to-book ratios — most of these stocks are down considerably lately
At $156/share, RNR is a $7.2bn market cap. In recent non-weather-event years they’ve been able to generate underwriting profits of roughly $250m (2018 and 2019) and net investment income has been $350-400m. With that, we can pencil in $600-650m of pre-tax earnings in a “normal” year before any investment gains / losses from other securities. That would get to 11-12x pre-tax earnings before any underwriting income growth or capital returns to shareholders…