Many of the world’s smartest value investors are going shopping in the insurance sector. Prem Watsa, the eagle-eyed chief of Fairfax Financial Holdings, has swooped down to acquire Zenith National Insurance Corp., a provider of workers’ compensation in the United States. Warren Buffett has upped his stakes in Munich Re and Swiss Re, two of the world’s largest reinsurance companies. And Wilbur Ross, who has made millions by buying up distressed companies, has told Fortune that he believes there are deep value opportunities among both life insurers and property and casualty insurers.
The Street Capitalist blog offers a useful rundown on some of the bargains available in the reinsurance sector. Nearly all the main players are going for less than book value. Many sport double-digit returns on equity. And most sell for less than seven times earnings.
What are the negatives? The market for insurance is reckoned to be soft and companies may see their business shrink over the next couple of years if they’re not prepared to reduce premiums. Many insurers also have exposure to U.S. commercial real estate and annuities, both of which could prove problematic.
Still, at current valuations, it’s easy to see why the world’s top bargain hunters are excited. Consider Everest Re Group Ltd. selling for just over six times earnings and at only 0.8 of its book value. Or Montpelier Re Holdings Ltd., which fetches under four times earnings and goes for 0.82 of book. By any standards, these companies look cheap.
Freelance business journalist Ian McGugan blogs for the Financial Post