The reinsurance industry can be a rather lucrative business, and several reinsurance stocks have great track records of delivering market-beating performance over long periods. After a rough year for the reinsurance industry in 2017, here are three reinsurance stocks that could be excellent additions to your portfolio for decades to come.
What is reinsurance?
Continue Reading Below
In simplest terms, reinsurance is insurance for insurance companies. Reinsurance can protect insurance companies from excessive losses resulting from catastrophic events -- such as major natural disasters. For example, the major hurricanes of summer 2017 could have potentially caused several smaller insurers to become insolvent if it wasn't for reinsurance.
There are two basic ways reinsurers make money, and they are the same ways that apply to traditional insurers as well. If a reinsurer collects more money in premiums than it pays out for claims, it generates an underwriting profit. Additionally, and perhaps more importantly, reinsurers invest the premiums they collect and generate income while they're waiting to pay claims.
A tough year in 2017 for reinsurers
As you can probably gather, 2017 was a difficult year for reinsurers. In fact, insured catastrophe losses reached $135 billion in 2017, an all-time high. Between the damage from Hurricane Harvey in Texas, Hurricane Irma in Florida and the Caribbean, and wildfires in California, natural disasters were an especially destructive force.
To be clear, reinsurers had more than enough capital to absorb these losses and only took a mild hit. However, it was enough to drive down stock prices and create some attractive long-term investments in the industry.
Three top reinsurance stocks
With that in mind, here are three great ways to invest in reinsurance. One has been beaten down by disaster-related losses, one has several other businesses to pick up the slack, and the third didn't feel the sting from 2017's disasters at all.
1. Everest Re Group
Everest Re provides reinsurance solutions to a wide variety of property and casualty insurers and had significant exposure to 2017's natural disasters. In the third quarter, the company had losses of $1.2 billion related to the year's major hurricanes and the Mexico City earthquake -- a pretty large amount for a company with a market cap of less than $10 billion. As a result, the company's stock plunged, and it currently trades for roughly 15% less than it did before the losses were revealed.
However, Everest is a strong reinsurer that should do just fine over the long run. The company is well capitalized and has excellent credit ratings (A+/A1 from S&P and Moody's). Over the past five years, Everest's book value per share has grown by 75% on 41% growth in gross written premiums. And over the past two decades, the company has operated at an average 11.8% return on equity and has grown shareholder value at a compound annual rate of 12.4%.
2. Berkshire Hathaway
Although it's not a pure play on the reinsurance business, no discussion of the industry's best companies would be complete without mentioning Berkshire Hathaway, the conglomerate led by Warren Buffett.
Insurance has been Berkshire's core business for some time. In fact, the reason for the company's long-term success is savvy investing of its insurance business' float. And although its Geico auto insurance subsidiary is perhaps the best-known component of its insurance business, reinsurance makes up more than two-thirds of the company's insurance operations, in terms of float size. Geico is actually Berkshire's third-largest insurance subsidiary, behind the Berkshire Hathaway Reinsurance Group and General Re.
Berkshire wasn't immune to the disaster-related losses by any means. In fact, the company said it lost $3 billion (pre-tax) to natural disasters during the third quarter, more than most analysts had been expecting. Even Geico took a big hit.
However, Berkshire's collection of dozens of non-insurance subsidiaries and its massive stock portfolio have helped to lessen the impact, and this diversification should continue to provide some cushion if another bad year for reinsurers happens. In fact, Berkshire's stock price is up 31% over the past year, handily beating the S&P 500.
3. Reinsurance Group of America
Given the major catastrophe losses plaguing other reinsurers, it may seem odd at first that Reinsurance Group of America's stock price has risen by 24% over the past year. However, the company focuses on the life and health insurance industries, not property-casualty, so the impact of the disasters was minimal. In fact, while most of the industry reported massive losses in the third quarter, Reinsurance Group of America (also known as RGA) reported EPS that increased by 13% year over year.
As of the end of 2017, RGA has approximately $3.3 trillion of life reinsurance in force, is the third-largest life and health insurer in the world by revenue, and is the only pure-play life and health reinsurer with global operations. About 61% of the company's revenue comes from the U.S. and Latin America, with the other 39% coming from many international markets.
RGA has an excellent track record of creating shareholder value. Over the past 15 years, the company has grown book value per share total returns at a 11.4% annualized rate, and since its 1993 IPO, the company has generated roughly double the return of the S&P 500.
10 stocks we like better than Berkshire Hathaway (A shares)When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Berkshire Hathaway (A shares) wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of January 2, 2018
Continue Reading Below