Property & Casualty Insurance company RenaissanceRe is taking Wall Street by surprise today, falling to $236.04 and marking a -3.2% change compared to the S&P 500, which moved 0.0%. RNR is -15.04% below its average analyst target price of $277.82, which implies there is more upside for the stock. Over the last year, RenaissanceRe shares have outstripped the S&P 500 by 3.0%, with a price change of 15.0%.
RenaissanceRe Holdings Ltd., together with its subsidiaries, provides reinsurance and insurance products in the United States and internationally. The company is included in the financial services sector, which includes a wide variety of industries such as credit services, mortgage, banking, and insurance. Owing to this variety and the fast pace of innovation within these industries, investors may struggle to make sense of this sector.
As evidenced by the financial meltdown of 2008, seemingly healthy financial services companies — from insurers to investment banks — may see their market value plunge to zero in a matter of months. While the financial crash was likely a once-in-a-generation event, it highlights the volatility that is inherent to the sector. Financial innovation creates opportunities, but also new types of risk that investors and even the companies themselves may not fully understand.
RenaissanceRe's trailing 12 month P/E ratio is 7.5, based on its trailing EPS of $31.54. The company has a forward P/E ratio of 6.6 according to its forward EPS of $35.17 -- which is an estimate of what its earnings will look like in the next quarter. The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the third quarter of 2024, the finance sector has an average P/E ratio of 15.92, and the average for the S&P 500 is 29.3.
To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in RenaissanceRe's free cash flow, which was $4.16 Billion as of its most recent annual report. Over the last 4 years, the company's average free cash flow has been $2.17 Billion and they've been growing at an average rate of 15.1%. With such strong cash flows, the company can not only re-invest in its business, it can afford to offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in RNR have received an annualized dividend yield of 0.6% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). Renaissancere's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 1.2, but is still below the average P/B ratio of the Finance sector, which stood at 1.78 as of the third quarter of 2024.
RenaissanceRe is likely undervalued at today's prices because it has a Very low P/E ratio, a lower P/B ratio than its sector average, and generally positive cash flows with an upwards trend. The stock has strong growth indicators because of its decent operating margins with a stable trend, and a PEG ratio of less than 1. We hope this preliminary analysis will encourage you to do your own research into RNR's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
