What Value Would You Place On RenaissanceRe Holdings Ltd (NYSE:RNR)?
One of the most difficult industry to value is insurance, given that they adhere to different rules compared to other companies. For example, insurance firms don’t have gross profits as such, but gross written premiums play a huge part in forecasting cash flows. Emphasizing elements like book values, along with the return and cost of equity, is suitable for calculating RNR’s intrinsic value. Today I will show you how to value RNR in a fairly useful and easy approach. View our latest analysis for RenaissanceRe Holdings
What Is The Excess Return Model?
Before we begin, remember that financial stocks differ in terms of regulation and balance sheet composition. Financial firms operating in Bermuda face strict financial regulation. In addition, insurance companies usually do not hold substantial portions of physical assets as part of total assets. So the Excess Returns model is suitable for determining the intrinsic value of RNR rather than the traditional discounted cash flow model, which places emphasis on factors such as depreciation and capex.
How Does It Work?
The key belief for this model is that equity value is how much the firm can earn, over and above its cost of equity, given the level of equity it has in the company at the moment. The returns in excess of cost of equity is called excess returns:
Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)
= (9.61% – 8.79%) * $100 = $0.93
Excess Return Per Share is used to calculate the terminal value of RNR, which is how much the business is expected to continue to generate over the upcoming years, in perpetuity. This is a common component of discounted cash flow models:
Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)
= $0.93 / (8.79% – 2.47%) = $14.71
Putting this all together, we get the value of RNR’s share:
Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share
= $100 + $14.71 = $127.65
Given RNR’s current share price of $121.65, RNR is , at this time, trading in-line with its true value. This means RNR isn’t an attractive buy right now. Valuation is only one part of your investment analysis for whether to buy or sell RNR. Fundamental factors are key to determining if RNR fits with the rest of your portfolio holdings.
Next Steps:
For insurance companies, there are three key aspects you should look at:
1. Financial health: Does it have a healthy balance sheet? Take a look at our free bank analysis with six simple checks on things like leverage and risk.
2. Future earnings: What does the market think of RNR going forward? Our analyst growth expectation chart helps visualize RNR’s growth potential over the upcoming years.
3. Dividends: Most people buy financial stocks for their healthy and stable dividends. Check out whether RNR is a dividend Rockstar with our historical and future dividend analysis.
For more details and sources, take a look at our full calculation on RNR here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
