Investors should look to insurance companies with more stable income due to uncertainty over how long favorable reserve development in the industry is expected to continue, says Robert Farnam, a Senior Vice President at Keefe, Bruyette & Woods, Inc.
“Workers’ compensation is actually a line, one of the largest commercial lines, and I think that that line is deficient. So you’ve already started to see some companies reporting adverse development there,” he said. “A lot of the commercial lines, I think, kind of the casualty lines, have questionable reserve adequacy, which could lead to adverse development going forward.”
Farnam has an “outperform” rating on Maiden Holdings, Ltd. (MHLD), a smaller Bermuda reinsurance company. He says the benefit of Maiden is that it’s different from other Bermuda reinsurance companies because it does not write property catastrophe risk, so its earnings are more stable.
“Their issue right now is that they are still sitting on too much cash. I think they still have to try to put that to work in this weak environment though. But stability is the key for them,” Farnam said. “I think they haven’t had a combined ratio out of the 90s since they’ve been in existence. So I think it’s attractively valued relative to what its performance expectations are.”