Citi previously touted a summer trade in reinsurance stocks because it has worked in the past (in part because hurricane season isn’t usually as bad as anticipated–see below). PartnerRe (PRE) was a top pick, but Citi can’t recommend fellow reinsurer RenaissanceRe (RNR):
Premium Difficult to Justify:
RenRe is the property-catastrophe leader in an industry with few barriers to entry. While we believe that investors would be willing to recapitalize RenRe in the event of a major loss and market opportunity and that RenRe gets a first look at more business than its peers, we do not believe this is enough to justify the premium price-to-book value at which it trades.
Diversifying Away the edge:
We believe RenRe’s historically superior returns have been the result of outsized Florida exposure combined with modest storm activity. The company’s move away from a Florida-centric model smoothes away outside returns and makes the company more like its peers in our view.
Moderating ROE Outlook:
Assuming a normal distribution of weather activity, we see ROEs declining amidst low revenue production. At 1.2x current book value, the stock faces the potential for multiple compression, unusual for most reinsurers which trade at or below book. Lowering EPS and TP to $52 from $57
Citi maintains a HOLD, cuts target from $57 to $52.