The re-insurance industry has a couple of major players that currently look like a bargain. Companies like Munich Re or Swiss Re are very cheap compared to their earnings andtheir dividends yield around six percent, a lot more than fixed income with solid ratings.
Large Telecom providers pay similar dividends, however, the substance of their business is deteriorating. So what’s the story in re-assurance? The global volume of desasters – man-made or natural desasters – has been increasing over the last decades. Whenever something big happens – an earthquake, Tsunami or nuclear desaster – the question comes up of how much re-insurers are impacted. And yes, in that year, they might have to face a loss due to that major event. However, in the mid- and long-term, they will adjust their risk ratings and charge higher fees to their customers. After all, insuring against major catastrophies is their key business and with an increasing number and impact of desasters, the operate in a growing market. At the same time, the ability of smaller insurance companies to carry the risk on their own decreases, so they are forced to transfer more risk to the re-insurers. Thus, the market outlook seems great.
But how ist he business model impacted by inflation and market uncertainty? To cover the risk, significant amounts of assets must be in place. The management of these assets is a key part of the business model. Taking risks with their investments, however, is not part of the deal, since the assets must stand good fort he insurance risks. This leads to a heavy fixed-income focus on the investments, which is subject to inflation risk as well. Over the long run, I believe the growing business will outweight the impact of inflation and re-insurers will – besides paying attractive dividends – prosper in a growing market.
Stocks to own: Re-insurance
Jun 29, 2012