Wilbur Ross: Value Opportunities in Insurance Stocks

Mar 9, 2010

Over the last few weeks, I have spent a lot of time trying to find certain industries that appear undervalued. One area is insurance, where many insurers with good combined ratios and past performance are trading below book. I was happy to see Wilbur Ross agree in this Q&A with Fortune:

Where do you think the biggest opportunities are now?

There are deep value opportunities in insurance stocks, which were beaten down because of their exposure to the subprime crisis, annuities, and commercial real estate. I won’t name names, but some well-managed life insurance and fire and casualty companies will come through this stronger. They used to trade at one or two times book value but now trade at three-quarters book…

Mr. Distress is ready to buy (Fortune)

A quick look at Google shows us how the sector is looking for reinsurance players:

Insurance Companies Undervalued

Most appear pretty cheap on the basis of book value. For the moment, it seems as if these companies are trading at discounts mainly due to market conditions. Most insurance companies are reporting that they are still in a soft market. I know that the folks at W.R. Berkley are expecting that things will start to turn. One indicator of that, to me, seems to be with the uptick in M&A activity. We saw Fairfax Financial acquire Zenith, and recently Perry Capital urged Endurance Services to find a merger partner:

PEMBROKE, Bermuda—One of the largest shareholders of Endurance Specialty Holdings Ltd. has urged the Pembroke, Bermuda-based insurer to find a merger partner.

New York-based hedge fund manager Perry Corp.—which owns 12.6% of Endurance and whose president, Richard C. Perry, is a member of its board of directors—said in a regulatory filing Monday that it expects consolidation in the Bermuda reinsurance market to accelerate in the near term.

Endurance “should undertake an evaluation of its strategic alternatives and pursue a possible merger or other strategic transaction in order to create a stronger company with a defined growth strategy,” Perry, which does business as Perry Capital L.L.C., wrote in the filing with the Securities and Exchange Commission.

In addition, Perry said recent executive appointments at Endurance will “not position the insurer to capitalize on consolidation opportunities.”

Endurance Shareholder Urges Merger (Business Insurance)

Richard Perry might also see the reinsurance sector as undervalued, which is why he thinks opportunities are ripe for Endurance Services. If that is not enough, we also saw Warren Buffett purchase stakes in Munich Re and Swiss Re. Smart, value savvy investors appear to be really interested in these companies and I think they are worth a look.

To me, the key will be to find insurance companies that are trading at low multiples with the capacity to increase policy volumes as the market improves.

Insurance Company Book Values
(Click for full size)

I still like Fairfax given its book value growth, great management team, and current price. However, I see plenty of other opportunities worth analyzing, especially with P&C insurers. I plan on posting some work that I have been doing on insurance companies sometime this week, so be sure to look for that.

Category: Insurance, Superinvestors, Value Investing, Warren Buffett, Wilbur Ross

Travis

What do you think the real long term earning multiple for reinsurance is(Or since that a function of price, lets say ROE or ROC)? Because, I'm quite happy to hold something with a p/e of 3 forever and earn my 33%. But obviously the trick is, reinsurers have great years, then horrible years once or twice a decade.

Another way to look at it is, I don't think the accounting really works for Reinsurers. What I mean to say is if once a decade or so a good portion of your book value is payed out, then part of your book value is really just float. So does paying full book value make sense. Some would argue that a dollar in float is worth at least as much as a dollar in assets. I feel I need to think about this issue more.

The other worry I have is that you have to talk about really really long holding periods, like 10-20 years, before the concept of "average" returns really starts to make sense.

What are your thoughts on these issues?

That said, I held MRH for a couple of years and only sold in early 09, to by some absurdly undervalued stocks. I think they have great management, and you might want to consider them. Thanks to your post, I'll certainly be considering buying back in to MRH, or perhaps a reinsurance basket.
Thanks!
Tariq

Honestly Travis I prefer to look at P&C insurers for that reason. I am readying a post series on analyzing those. They are easier to analyze than the reinsurance cos.

Still, when you see a lot of reinsurers trading at low multiples compared to their historical average, you might find some opportunities. With Hati, Chile, there are exposure fears, but maybe one in the group is pretty insulated. For reinsurance you really need to get a feel for management and their track record with underwriting because the future is always so uncertain. I don't advocate doing buy-and-hold-forever with reinsurers, for me it is more like a play on earnings normalizing which should push up the multiple Mr. Market is giving them.
marketfolly

Good stuff Tariq, we're seeing opportunity here as well. A lot of hedgies had been in RenaissanceRe but have sold out as of late. Aspen looks intriguing here but we're just starting to do work on it. Look forward to your findings.
gigurdjieff

I agree, good article Tariq, but I'm worried about the 10-20 years holding periods. I work in car insurance, a field where timing is critical, and most of us are not willing to wait so long for the concept of average returns to become visible. Isn't there a faster way of achieving the same results?
Tariq

You know with holding times, it really depends on the type of insurer.

I think with reinsurers you are never going to want to hold them for the long term. If a huge catastrophe occurs you can lose everything. I would say that reinsurers typically need to be held for shorter periods... Sometimes, you will see them stay depressed even after hurricane season. That might be a good time to start looking at the group. But I would not own most reinsurers through hurricane season because of that black swan catastrophe risk.

With short-tail insurers, like in car insurance which you refer to - I think that holding periods can be extended. If you can find an auto insurer that is conservative with their reserving practices, great record of combined rations, has a history of profitability, and is trading below book because of some temporary dislocation you might have an opportunity to grab a great holding that will grow for years.

You might want to look at insurance brokers. They tend to be profitable in soft and hard markets, but can really earn a lot if the market turns hard. They allow you to remove the need to figure out one insurer and instead bet on the overall market. Willis Group (WSH) is one that I was looking at because it seems to have that quality.

Street Capitalist: Event Driven Value Investments

Wilbur Ross: Value Opportunities in Insurance Stocks

About Me

Subscribe to Street Capitalist

E-Mail Updates

Post Categories

Monthly Archives

Recent Comments

Accredited Investors