If there's something strange in the neighborhood that causes massive property damage, the Ghostbusters might be able to help you get rid of it. Getting you the money needed to clean the ectoplasm off of everything and rebuild -- that's where insurers like RenaissanceRe (NYSE: RNR ) come in.
RenaissanceRe's primary business is providing reinsurance for property and casualty and other specialty risks. The model for a reinsurer is very similar to that of a mainline insurer like American International Group (NYSE: AIG ) -- it collects an up-front premium in exchange for assuming some risk that the customer wants to pass off. The difference with reinsurers, though, is that they are providing the insurance to other insurers to protect them against massive losses associated with major events like earthquakes or hurricanes.
And speaking of hurricanes, the terrible trio of Katrina, Rita, and Wilma back in 2005 took a serious bite out of the P&C reinsurers like RenaissanceRe. Katrina was one of the most destructive hurricanes in U.S. history, causing tens of billions of dollars' worth of damage -- enough to challenge the insurance risk models. Stacking the three major storms together was absolutely devastating to many reinsurers.
The question investors (and actuaries) are faced with now is whether the power and breadth of the 2005 storms was a result of climate change, and thus something we can expect more of, or whether it was just a freak cluster of storms that won't be matched for another 50 or 75 years.
CAPS All-Star slbutton gave RenaissanceRe a thumbs-up, reasoning that the price is just too good to pass up:
[RenaissanceRe's] price is 1.5 times book value. Trailing P/E is under 5. [Return on equity] is better than 28%. [It also has] high insider ownership and a dividend that has room to grow (8% payout ratio). Apparently, folks would rather own a pet velociraptor that can't find the litter box than a piece of the reinsurance business.
Though I have a heck of a lot of respect for Mother Nature, I can't help but agree with slbutton's thought process. Investors have largely shunned the P&C reinsurance industry since the calamities of '05, and I'm not convinced that we'll see another season like that anytime soon. If we don't, in fact, see more storms on steroids (much less three storms on steroids in one season) for a couple decades or so, the firms like RenaissanceRe that made it to the other side of 2005 should do quite well.
CAPS players who have been bullish on RenaissanceRe have also taken a liking to Motley Fool Hidden Gems picks Montpelier Re and First Marblehead (NYSE: FMD ) , as well as Income Investor pick Johnson & Johnson (NYSE: JNJ ) . Do you agree with these CAPS-playin' Fools? Get on CAPS and get your voice heard.
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Montpelier Re is a Motley Fool Stock Advisor pick. First Marblehead is a Hidden Gems selection. Johnson & Johnson is an Income Investor recommendation. You can check out any (or all!) of our newsletters with a 30-day free trial.
Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. The Fool's disclosure policy has been given an AAA+++ rating by Fitch, a level of strength that has never before been seen. The rating carries a positive outlook.