Citi sees a seasonal trade in reinsurance stocks like PartnerRe (PRE). Why? Because hurricane season will be lighter than expected (the 2005 hurricanes are still fresh in people’s minds). Citi says load up on catastrophe-exposed stocks like reinsurance:
Historically, reinsurance stocks trade poorly in the first half of the year and appreciate noticeably in the second half. This trading pattern is somewhat counterintuitive, as operational performance is noticeably poorer in the second half. We explain this phenomenon by noting that strong first half operational performance is easy to achieve generally, as high loss exposures for insured risks fall heavily on the North Atlantic wind season, which occurs in the second half of the year. We believe the investment community tends to amortize all the book value growth (and these stocks are almost always valued as a multiple of book value) for the whole year into valuation only during the second half of the year as the passage of “real risk” occurs.
Citi is also swapping out of Arch Capital (ACGL) and into PartnerRe (PRE) in its Top Picks Live. While they remain bullish on both, they see greater near-term upside for PRE:
…given a combination of its pure-play reinsurance position, lower reinsurance risk dynamics, and higher leverage to the “summer trade.”