Late in the day, I looked at a table of valuations of the remaining major investment banks, and thought, “Huh, they’re priced like Bermuda Reinsurers. Price-to-book near 1 or lower, and expected P/Es in the middle single digits.” Well, that got me thinking… how are those two groups of companies alike?
- When losses come they can be severe.
- Both have strong underwriting cycles where a lot of money is made in the boom phase, and a lot gets lost in the bear phase.
- Earnings quality can be poor, unless management teams have a bias against meeting Street expectations, and allowing earnings to be ragged.
- The opacity of the investment banks’ swap books is matched by that of the reinsurers’ reserving.
- Both businesses are highly competitive, and global in scope.
Now, what’s different?
- The reinsurers typically don’t have asset problems, only reserving problems.
- The Bermuda reinsurers know that one day a change in their tax status may come (somehow forced to pay US tax rates — ask Bill Berkley), and that would lower earnings.
- The financial leverage of the reinsurers is a lot lower.
- The financing of reinsurers is a lot more secure.
The risk-reward seems balanced to me across the two groups. The reinsurers are lower-risk/lower-reward, and the investment banks are higher on both scores. Choose in accordance with your risk tolerance — as for me, I’ll look at the reinsurers.