Street Capitalist: Event Driven Value Investments

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:

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.

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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.