Seeking Reinsurer Bargains Post-Hurricane Hit/s

Stocks: Validus Holdings (ticker VR)

Validus Holdings could have been an appealing investment

Tumbling 15.45% to its lowest point in the past week during Hurricane hit/s, Bermuda-based reinsurer Validus Holdings recovered outstandingly having generated 16.31% share price gains in just four business days.

Trading at its book value with a 3% trailing dividend yield with 40% payout ratio, Validus does reflect a very appealing investment.

In its recent six months operations, the reinsurer registered 2.2% year over year growth in its revenue to $1.33 billion and a contrasting 25% profit drop to $195.7 million (15% margin compared to 20% a year earlier).

Validus recorded 6% higher total expenses and another $8.6 million allocations to its AlphaCat investors resulting in lower profits in the period.

Returns

Despite the recent runup, Validus has actually provided 9.43% total losses to its shareholders so far this year compared to S&P 500’s 13.19%.

 Validus Holdings

According to filings, Validus Holdings, Ltd. was incorporated under the laws of Bermuda on October 19, 2005.

The Company and its subsidiaries conduct its operations worldwide through four operating segments: Validus Re, Talbot, Western World, and AlphaCat.

Validus seeks to establish itself as a leader in the global insurance and reinsurance markets.

Further, the company’s principal operating objective is to use its capital efficiently by underwriting primarily short-tail insurance and reinsurance contracts with superior risk and return characteristics.

Validus’ primary underwriting objective is to construct a portfolio of short-tail insurance and reinsurance contracts that maximize the company’s return on equity subject to prudent risk constraints on the amount of capital we expose to any single event.

The company manages its risks through a variety of means, including contract terms, portfolio selection, diversification, including geographic diversification, and proprietary and commercially available third-party vendor catastrophe models.

As of 2016, Validus had 40% of its gross written premiums in the United States.

Validus Re

Validus Re is a global reinsurance segment focused primarily on treaty reinsurance.

In the first half, total underwriting revenue in the Validus Re business declined 6% year over year to $459 million (42% of gross unadjusted revenue) and generated an underwriting margin of 30% compared to 31% a year earlier.

Validus noted that the decline in its gross premiums were results of the decline in agriculture premiums and reductions in participation and the non-renewal of various catastrophe programs due to market condition.

Talbot

Talbot is a specialty insurance segment, primarily operating within Lloyd’s insurance market through Syndicate 1183.

In the first half, revenue in Talbot business fell 5% year over year to $387.8 million (36% of gross unadjusted revenue) and underwriting margin of 5% compared to 7% a year earlier.

Gross premium written for Talbot actually declined more at 9% brought by the decrease in the marine and other treaty account, reductions in participation and non-renewals on various programs associated with property lines, and decreases in the contingency and accident and health classes due to adjustments on existing business and the non-renewal associated with specialty lines.

Western World

Western World is a U.S. based specialty excess and surplus lines insurance segment operating within the U.S. commercial market.

In the first half, revenue in the Western World business jumped 79% year over year to $228.9 million (21% of gross unadjusted revenue) and an underwriting loss of $12.9 million compared to $10.5 in losses a year earlier.

Higher gross written premium at 100% year over year growth resulted in higher revenue for Western World. This growth resulted from increased premiums written in association with new agriculture business, property and liability lines.

Losses, meanwhile, also more than doubled brought by the aforementioned increase in specialty lines due to new agriculture business is written through and in relation to the company’s Crop Risk Services and lower favorable development on prior accident years.

AlphaCat

AlphaCat is a Bermuda based investment adviser, managing capital for third parties and the Company in insurance linked securities (“ILS”) and other property catastrophe and specialty reinsurance investments.

Revenue in the AlphaCat segment rose 27% year over year to $11.47 million and generated Income before investment income from AlphaCat Funds and Sidecars margin of 32% compared to 40% a year earlier.

Sales and profits

In the past three years, Validus’ revenue growth averaged 4.2%, profit decline average 11.9%, and profit margin average of 17.9% (Morningstar).

Cash, debt and book value (equity)

As of June, Validus had $800 million in cash and cash equivalents and $1.85 billion in long-term debt with debt-equity ratio 0.44 times vs. 0.30 times a year earlier. Overall debt increased by $696 million while equity rose $345 million to $4.2 billion.

Cash flow

Validus’ cash flow from operations declined by 23% year over year in its recent six months operations to $53 million mostly because of lower profits in the period. The reinsurer did not have any capital expenditures while it raised $626 million in debt issuance (net repayments and other financing activities) and provided $93 million or 175% of its cash flow in dividends and share repurchases.

The cash flow summary

In the past three years, Validus raised $1.37 billion in debt (net repayments and other financing activities), generated $987 million in free cash flow, and provided $1.33 billion in dividends and share repurchases at a free cash flow payout ratio of 151%.

Conclusion

If not for the company’s growing Western World business, Validus may have delivered far more unappealing results based on its recent first half performance, thus supports its underappreciated shares. In addition, this growing segment also delivered wider losses in its recent operations.

The company’s return on assets and equity figures as of its fiscal 2016 also were several percentages lower from its prior year figures indicating lesser overall profitability. Nonetheless, Validus does provide hefty payouts to its shareholders despite this difficulty in generating more profits.

Average analysts estimates have an overweight recommendation on Validus with a target price of $57.88 a share compared to $47.23 at the time of writing. On the other hand, applying a 10% discount from its book value indicated a conservative per share figure of $47.7 a share.

In summary, Validus is a pass.

Quotes

Validus’ Chairman and CEO Ed Noonan stated in its second quarter report:

“I’m very pleased to report another very solid quarter for Validus. Despite soft trading conditions across the global market and elevated industry event frequency we were able to deliver an 82.5% combined ratio in the quarter and grew our book value per diluted share including dividends by 2.1%. We continue to position the Company well to weather the soft market while building the foundation to benefit from better market conditions down the road.”

Disclosure: I do not have shares in any of the companies mentioned.

Hurricane Bargain? Aspen Insurance Holdings

Recent operations did not bring any attractiveness despite high discount to book value
Stock: Aspen Insurance Holdings (ticker: AHL)

Reinsurers are recently hit brought by their exposure to such calamities that have occurred in Florida.

A Bermuda-based $2.3 billion insurance company with 51% of its gross written premiums based in the United States, Aspen Insurance is worth a look.
The company’s shares dropped 6.3% in the days that Hurricane Irma’s landfall in Florida while having jumped a whopping 9.44% after lost estimates were reduced.

Meanwhile, the insurer’s cheap 0.6 times PB ratio accompanied by a decent 2.4% trailing dividend yield with 36% payout ratio could trigger an easy decision that it is a great value and a worthy buy even today even without waiting for the accumulative after effects of Hurricane Irma and Harvey in the coming quarters.

Aspen, nonetheless, exhibited an already weak 13% decline in revenue and 4% drop in profits as per its recent six months operations compared to its year ago period.
This decline in profits was observed despite that Aspen was able to reduce its total expenses by 14%. Net earned premiums (85% of revenue) declined by 14.9%.

Further, Aspen management brought up that Aspen was operating in a challenging environment during the press release.

Returns
The company has provided 22.82% total losses to its shareholders so far this year compared to the S&P500’s 11.51% total gains.

Aspen
Aspen Insurance Holdings Limited (“Aspen Holdings”) was incorporated on May 23, 2002, as a holding company headquartered in Bermuda.

Aspen underwrites specialty insurance and reinsurance on a global basis through its Operating Subsidiaries based in Bermuda, the United States, and the United Kingdom: Aspen U.K. and AUL, corporate member of Syndicate 4711 at Lloyd’s of London and managed by AMAL (United Kingdom), Aspen Bermuda (Bermuda) and Aspen Specialty and AAIC (United States). The company also has branches in Australia, Canada, France, Germany, Ireland, Singapore, Switzerland and the United Arab Emirates.

Aspen has two distinct business segments, Aspen Insurance and Aspen Reinsurance (“Aspen Re”).

Aspen Insurance
Aspen Insurance consists of (i) property and casualty insurance, (ii) marine, aviation and energy insurance, (iii) and financial and professional lines insurance.

Gross written premium for the insurance business grew 6% in the first half to $900.9 million (49% of written premiums) and an underwriting income margin of 6.3% compared to 8.3% a year earlier.

Aspen Re

Aspen Re consists of (i) property catastrophe reinsurance (including the business written through Aspen Capital Markets), (ii) other property reinsurance, (iii) casualty reinsurance, and (iv) specialty insurance and reinsurance.

Aspen Re gross written premiums decreased by 0.9% year over year to $919.2 (51% of total written premiums) and underwriting losses of $10.3 million vs. profits of $17.6 million a year earlier.

Sales and profits
In the past three years, Aspen registered revenue growth average of 6.6%, profit decline average of 14.9%, and profit margin average 9.75% (Morningstar).

Cash, debt and book value
As of June, Aspen had $1.23 billion in cash and cash equivalents and $7 million in long-term debt with debt-equity ratio 0.18 times–at par in the same period last year. Equity rose by $4 million to $3.62 billion from a year earlier period.

Cash flow
Aspen’s had $104 million in cash outflow from operations brought by lower payables and other assets in its first half of operations. The company also had a free cash outflow of $122 million compared to $223 million a year earlier. Aspen also allocated $114 million in long-term debt repayments and spent $133 million in preferred stock redemptions.

The cash flow summary
In the past three years, Aspen allocated $64 million in capital expenditures, raised $118 million in debt net repayments and $12 million in share issuances, generated $1.57 billion in free cash flow, and provided $611 million in dividends and repurchases at an average free cash flow payout ratio of 39%.

Conclusion
Aspen’s recent sharp rise in share price brought some relief from several hurricane episodes should be taken as a caution. This is because the company has performed weakly in its recent months of operations absent such recent events. Further, both metrics ROE and ROA has fallen in recent years too.

Aspen’s reinsurance business, in particular, has experienced weak premium growth accompanied even by losses in the recent first half period.

Nonetheless, the company has a strong balance sheet accompanied by a healthy free cash flow generation and prudent payout ratios.

Analysts have an average hold recommendation on Aspen with a target price of $51 a share vs. $41.75 at the time of writing. Asking a 25% discount from Aspen’s book value would still indicate an 8.6% upside from today’s share price to $45.36.

In summary, Aspen is a pass.

Quotes
Chris O’Kane, Chief Executive Officer

“We continue to make progress in both Reinsurance and Insurance to enhance further our competitive position and profitability.
“With a strong regional network and deep local relationships, the Aspen Re team has been able to capture new opportunities and again deliver strong results in an operating environment that remains challenging. The Aspen Insurance team remains focused on lines that provide the best opportunities for long-term profitable growth such as Professional Liability, with its excellent track record of growth and strong underwriting performance.
“While our second quarter underwriting results reflected elevated loss levels in certain areas of the business, our investment performance contributed positively to diluted book value per share growth.”