RenaissanceRe Stock Has A 40% Upside

We believe that RenaissanceRe’s stock (NYSE: RNR) has an upside potential of around 40% in the next 1.5-2 years, once the low investment yields see some recovery. RenaissanceRe, a provider of reinsurance, insurance, and other related business services, trades at $145 currently and has gained 12% in value so far this year. It traded at a pre-Covid high of $202 in February 2020 and is 28% below that level now. Also, RNR stock has gained 10% from the low of $132 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government, which has helped the stock market recover to a large extent. The stock is lagging the broader markets by a huge margin (S&P 500 is up about 89% since March lows), as investors are concerned about its escalating expense levels and a drop in net investment income, which has weighed on the company’s profitability.

Although RenaissanceRe has reported a 23% y-o-y growth in its full-year 2020 revenues, its profitability has suffered – net income margin reduced from 17.8% to 14.75. This was due to higher net claims and claim expenses, acquisition costs, and other operational expenses. Further, RNR net investment income has suffered in the past year due to interest rate headwinds. Additionally, the same trend continued in the first quarter of 2021, as well. That said, as the Covid-19 crisis subsides and the economy moves toward normalcy, we expect the investment yields to recover, though it will take some time before returning to the pre-Covid-19 levels. This coupled with growth in invested assets will likely improve the net investment income. Further, the company has reported strong growth in gross earned premiums and we expect the momentum to continue. In view of the meager growth in RenaissanceRe stock since late March 2020, we believe that the stock has strong growth potential in the next 1.5-2 years (back to its pre-Covid peak). Our conclusion is based on our detailed analysis of RenaissanceRe’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• From 3/24/2020: S&P 500 recovers 89% from the lows seen on Mar 23, 2020, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how RNR and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in the S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of the S&P 500 index
• 1/1/2010: Initial recovery to levels before the accelerated decline (around 9/1/2008)

RenaissanceRe vs S&P 500 Performance Over 2007-08 Financial Crisis

RenaissanceRe stock declined from levels of around $66 in October 2007 (the pre-crisis peak) to roughly $45 in March 2009 (as the markets bottomed out), implying that the stock lost around 32% of its value from its approximate pre-crisis peak. This marked a smaller drop than the broader S&P, which fell by about 51%.

RNR partially recovered post the 2008 crisis to about $53 in early 2010 – rising by 18% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.

RenaissanceRe’s Fundamentals in Recent Years Look Strong

RenaissanceRe revenues grew by 146% from $2.1 billion in 2017 to $5.2 billion in 2020, primarily led by the growth in premiums coupled with the impact of the acquisition of Tokio Millennium Re (TMR). Similarly, the company’s net income improved from -$222 million to $762 million over the same period. The company’s Q1 2021 revenues were 4% below the year-ago period and its EPS figure decreased from -$1.89 to -$5.87.

CONCLUSION

Phases of Covid-19 crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment

Keeping in mind the trajectory over 2009-10, this suggests a potential recovery to around $202 (39% upside) once economic conditions improves. This marks a full recovery to the $202 level RNR stock was at before the coronavirus outbreak gained global momentum.

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