Weathering the storms

We recommended subscribers take a look at the Sydney-based Reinsurance Corporation of Australia, or ReAC as it is known, back in issue 36 (Speculative Buy - $1.02). Reinsurance stocks everywhere had a bad 1999 thanks to an unusually high level of natural and man-made disasters around the world, which meant an unusually high level of claims. At the same time, premiums in the reinsurance business had been fairly soft for some time, thanks to excess industry capacity. With ReAC stock having fallen from $3.36 in late 1998 and cash and investments worth more than $2.00 a share, it seemed a reasonable punt that the company could withstand the 'adverse claims cycle' and prosper.

That didn't stop the stock dropping below $1 when it announced a $115.8m loss for the six months to 31 August 1999. And the unfolding saga of GIO having to raise its provision against reinsurance losses several times left investors nervous to revisit such stocks. Add to that Y2K jitters and the severe windstorms which lashed France just after Christmas, and it's little wonder ReAC shares are so low.

In instances like this, fortune favours the brave. In adverse claims cycle weaker players in the reinsurance industry eventually leave and the survivors, those who have managed their riska prudently and been conservatively financed, get to raise premiums markedly. We think ReAc, given the years of experience of its management team should be placed in the survivor category, and maintain our SPECULATIVE BUY recommendation.