The stock has gained 11% since the March 23 lows of the last year, and at the current price of $146 per share, we believe RenaissanceRe Stock (NYSE: RNR) has more upside potential. RenaissanceRe, a provider of reinsurance, insurance, and other related business services, has seen its stock rally from $132 to $146 off the 2020 March bottom compared to the S&P which moved around 90%. While the stock is lagging the broader markets by a huge margin, it has lost around 12% YTD. That said, the company has reported an increase in revenues over the recent quarters on a year-on-year basis – the top line has grown 20% y-o-y to a consolidated figure of $5.13 billion for the last 4 quarters. However, RNR stock has lost around 20% over the last twelve months. Hence, there is a mismatch between the stock growth and revenues. The stock has suffered due to escalating expense levels and a drop in net investment income, which has weighed on the company’s profitability.
RenaissanceRe’s stock has partially reached the level it was at before the drop in February 2020 due to the coronavirus outbreak becoming a pandemic. Despite the meager rise since the March 23 lows, we feel that the company’s stock still has potential as its valuation implies it has further to go.
While the company’s total revenues rose around 149% from $2.1 billion in 2018 to about $5.2 billion in 2020, it translated into a 235% increase in the net income figure. The unusually high increase in both revenues and net income was due to organic growth in premiums coupled with the impact of the acquisition of Tokio Millennium Re in 2019. Further, net realized and unrealized gains on investments grew from -$184 million in 2018 to $821 million in 2020. That said, the profitability figures were partially offset by a 130% jump in the total expenses.
Although RNR’s revenue and earnings have grown over 2018-2020, its P/E multiple has decreased. We believe the stock is trading below its near-term potential and has some scope for upside, despite the potential weakness from a recession-driven by the Covid outbreak. Our dashboard “What Factors Drove 9% Change In RenaissanceRe Stock Between 2018-End And Now?”provides the key numbers behind our thinking.
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RenaissanceRe’s P/E multiple has changed from just above 27x in FY 2018 to around 11x in FY 2020. While the company’s P/E is just below 10x now, there is scope for upside when the current P/E is compared to levels seen in the past years – P/E multiple of around 11x at the end of 2020 and 12x at the end of 2019.
RenaissanceRe’s total expense figure has skyrocketed over the past few years due to higher net claims and claim expenses, acquisition costs, and other operational expenses. The company mainly has two business lines – property and casualty & specialty insurance. The property segment contributed around 52% of the total gross premiums, out of which around 63% is derived from catastrophe insurance. The profitability of the property segment is heavily dependent on catastrophe loss and hence has an element of volatility in it. This makes the net investment income even more important for the overall profitability of the company. However, RNR witnessed a 17% y-o-y drop in its NII in 2020 due to the lower interest rate environment. Further, the same trend continued in the first quarter of 2021, with the company reporting a 20% y-o-y drop in its NII. That said, we expect the investment yields to see some improvement in the current year, though they are still likely to remain below the pre-covid-19 levels. This coupled with growth in total investable assets will likely improve the net investment income of RNR, benefiting its profitability figures. Overall, RenaissanceRe’s revenues in FY2021 are unlikely to continue their growth momentum. Further, improvement in its profitability figures is likely to serve as a reality check for the investors, positively impacting its stock price.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Israel. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.
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