Stocks: Validus Holdings (ticker VR)
Validus Holdings could have been an appealing investment
Tumbling 15.45% to its lowest point in the past week during Hurricane hit/s, Bermuda-based reinsurer Validus Holdings recovered outstandingly having generated 16.31% share price gains in just four business days.
Trading at its book value with a 3% trailing dividend yield with 40% payout ratio, Validus does reflect a very appealing investment.
In its recent six months operations, the reinsurer registered 2.2% year over year growth in its revenue to $1.33 billion and a contrasting 25% profit drop to $195.7 million (15% margin compared to 20% a year earlier).
Validus recorded 6% higher total expenses and another $8.6 million allocations to its AlphaCat investors resulting in lower profits in the period.
Despite the recent runup, Validus has actually provided 9.43% total losses to its shareholders so far this year compared to S&P 500’s 13.19%.
According to filings, Validus Holdings, Ltd. was incorporated under the laws of Bermuda on October 19, 2005.
The Company and its subsidiaries conduct its operations worldwide through four operating segments: Validus Re, Talbot, Western World, and AlphaCat.
Validus seeks to establish itself as a leader in the global insurance and reinsurance markets.
Further, the company’s principal operating objective is to use its capital efficiently by underwriting primarily short-tail insurance and reinsurance contracts with superior risk and return characteristics.
Validus’ primary underwriting objective is to construct a portfolio of short-tail insurance and reinsurance contracts that maximize the company’s return on equity subject to prudent risk constraints on the amount of capital we expose to any single event.
The company manages its risks through a variety of means, including contract terms, portfolio selection, diversification, including geographic diversification, and proprietary and commercially available third-party vendor catastrophe models.
As of 2016, Validus had 40% of its gross written premiums in the United States.
Validus Re is a global reinsurance segment focused primarily on treaty reinsurance.
In the first half, total underwriting revenue in the Validus Re business declined 6% year over year to $459 million (42% of gross unadjusted revenue) and generated an underwriting margin of 30% compared to 31% a year earlier.
Validus noted that the decline in its gross premiums were results of the decline in agriculture premiums and reductions in participation and the non-renewal of various catastrophe programs due to market condition.
Talbot is a specialty insurance segment, primarily operating within Lloyd’s insurance market through Syndicate 1183.
In the first half, revenue in Talbot business fell 5% year over year to $387.8 million (36% of gross unadjusted revenue) and underwriting margin of 5% compared to 7% a year earlier.
Gross premium written for Talbot actually declined more at 9% brought by the decrease in the marine and other treaty account, reductions in participation and non-renewals on various programs associated with property lines, and decreases in the contingency and accident and health classes due to adjustments on existing business and the non-renewal associated with specialty lines.
Western World is a U.S. based specialty excess and surplus lines insurance segment operating within the U.S. commercial market.
In the first half, revenue in the Western World business jumped 79% year over year to $228.9 million (21% of gross unadjusted revenue) and an underwriting loss of $12.9 million compared to $10.5 in losses a year earlier.
Higher gross written premium at 100% year over year growth resulted in higher revenue for Western World. This growth resulted from increased premiums written in association with new agriculture business, property and liability lines.
Losses, meanwhile, also more than doubled brought by the aforementioned increase in specialty lines due to new agriculture business is written through and in relation to the company’s Crop Risk Services and lower favorable development on prior accident years.
AlphaCat is a Bermuda based investment adviser, managing capital for third parties and the Company in insurance linked securities (“ILS”) and other property catastrophe and specialty reinsurance investments.
Revenue in the AlphaCat segment rose 27% year over year to $11.47 million and generated Income before investment income from AlphaCat Funds and Sidecars margin of 32% compared to 40% a year earlier.
Sales and profits
In the past three years, Validus’ revenue growth averaged 4.2%, profit decline average 11.9%, and profit margin average of 17.9% (Morningstar).
Cash, debt and book value (equity)
As of June, Validus had $800 million in cash and cash equivalents and $1.85 billion in long-term debt with debt-equity ratio 0.44 times vs. 0.30 times a year earlier. Overall debt increased by $696 million while equity rose $345 million to $4.2 billion.
Validus’ cash flow from operations declined by 23% year over year in its recent six months operations to $53 million mostly because of lower profits in the period. The reinsurer did not have any capital expenditures while it raised $626 million in debt issuance (net repayments and other financing activities) and provided $93 million or 175% of its cash flow in dividends and share repurchases.
The cash flow summary
In the past three years, Validus raised $1.37 billion in debt (net repayments and other financing activities), generated $987 million in free cash flow, and provided $1.33 billion in dividends and share repurchases at a free cash flow payout ratio of 151%.
If not for the company’s growing Western World business, Validus may have delivered far more unappealing results based on its recent first half performance, thus supports its underappreciated shares. In addition, this growing segment also delivered wider losses in its recent operations.
The company’s return on assets and equity figures as of its fiscal 2016 also were several percentages lower from its prior year figures indicating lesser overall profitability. Nonetheless, Validus does provide hefty payouts to its shareholders despite this difficulty in generating more profits.
Average analysts estimates have an overweight recommendation on Validus with a target price of $57.88 a share compared to $47.23 at the time of writing. On the other hand, applying a 10% discount from its book value indicated a conservative per share figure of $47.7 a share.
In summary, Validus is a pass.
Validus’ Chairman and CEO Ed Noonan stated in its second quarter report:
“I’m very pleased to report another very solid quarter for Validus. Despite soft trading conditions across the global market and elevated industry event frequency we were able to deliver an 82.5% combined ratio in the quarter and grew our book value per diluted share including dividends by 2.1%. We continue to position the Company well to weather the soft market while building the foundation to benefit from better market conditions down the road.”
Disclosure: I do not have shares in any of the companies mentioned.