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Return on Equity is a commonly used metric among investors and is calculated by dividing the amount of net income generated in a given period by the shareholder’s equity at the end of said interval. When the percentage is compared with similar companies within an industry, investors can assess those with higher income growth rates over a historical period, and gain a better idea of how profitable a company could be over time.

Reinsurers help mitigate losses to insurance companies by agreeing to take on some of the risk an insurer might incur after the primary insurer has incurred a preset loss level. Reinsurers are subject to the same event-related risks as insurers, such as hurricanes, tropical storms, wildfires, and multi-peril crop damages. However, since the risks and costs are spread out across a diversified portfolio of insurance policies, companies should be able to remain solvent after a particular event. On a company specific level, it is important for the individual reinsurer to maintain a certain level of underwriting discipline, making sure to adequately price its policy premiums. Additionally, investors looking to invest in this space should seek out companies with a long track record and a healthy balance sheet that would be capable of weathering a sustained period of above-average catastrophe claims. 

This week we ran a screen to identify reinsurance companies that had above average (15% for the industry) return on equity in 2013. Two of the companies we have selected are Greenlight CapitalRe (GLRE) and RenaissanceRe Holdings (RNR). Both of these outfits have relatively strong ROE figures in comparison to their peers.

Greenlight Capital Re

Greenlight Capital Reinsurance was founded by famed investor David Einhorn under the parent company, Greenlight Capital. Starting as a hedge fund investing primarily in publicly traded North American corporate debt offerings and equities, the company began its property and casualty reinsurance business in 2004. Based in the Cayman Islands and Ireland, the company provides various specialized reinsurance products to insurance, risk-retention group, and financial markets.

The past few quarters have experienced a relatively weaker-than-expected market in terms of reinsurance pricing. While the company has been able to maintain its loss ratio while offsetting such pressures, less demand could potentially stunt growth for the near term. However, management recently upgraded its underwriting platform through more-experienced hires and a heightened focus on expanding its platform for longer-duration casualty revenues. This means the company is ready to take on more risk, which could augur well for more long-term growth.

Greenlight Capital Re posted an ROE of 21.5% in 2013, above most of its peers in this sector. Historically the company has done a solid job of generating profit through both its reinsurance platform and investment portfolio, which is headed by Mr. Einhorn. In addition to its strong history of generating income, we expect long-term appreciation prospects to remain solid for this company. Return on equity should continue to grow over the next three to five years, especially as the company expands its reinsurance portfolio to take on longer-duration risks in an effort to spur results.

RenaissanceRe Holdings

RenaissanceRe Holdings, founded in June of 1993, provides property and catastrophe reinsurance, as well as specialty coverage, to insurers and reinsurers on a global basis. The company has a presence within the Lloyds of London market, as well as various subsidiaries and joint ventures in which its policies are written. While the Bermuda-based company provides a wide array of products, about 80% of its written premium base consists of property and catastrophe reinsurance.

The overall reinsurance marketplace has been experiencing declining prices as of late, particularly after the mid-year renewal periods. Additionally, the industry has been getting increasingly competitive, with existing players such as Everest Re (RE) and PartnerRe (PRE) gaining market share, which may not augur well for premium growth. That said, trends could reverse, especially if an unforeseen event occurs. The company has managed to maintain its margins and losses despite the difficult environment, and has a history of generating solid returns.

RenaissanceRe was able to generate an ROE of about 16.8% in 2013, comparatively higher than most of its peers. In addition, the company has historically had high underwriting margins, illustrating its ability to keep its losses low. While the near-term outlook may not seem upbeat, management has been able to keep a solid capital position while providing returns. With its sound balance sheet, RenaissanceRe is able to handle obstacles as they arise and is less exposed to market volatility. The company should weather some short-term difficulties and reverse its trends in the next few years.

 

Company Name

Ticker Symbol

Return on Shareholders Equity

Assured Guaranty

AGO

15.79

Everest Re Group Ltd.

RE

15.3

Greenlight Capital Re

GLRE

21.46

RenaissanceRe Hldgs.

RNR

16.79

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.