TheStreet.com Ratings: Reinsurers Redux

Bottom line? Reinsurers continue to benefit from all angles -- new capital inflows, increasing rates and lower losses.

Ten of the 13 domestic reinsurers we rate are now buys. They are: Reinsurance Group of America(RGA Quote), Arch Capital(ACGL Quote), Odyssey Re(ORH Quote), Partner Re(PRE Quote), Everest Re(RE Quote), Endurance Specialty(ENH Quote), Platinum Underwriters(PTP Quote), Transatlantic(TRH Quote), Renaissance Re(RNR Quote) and Max Re Capital(MXRE Quote).

Two more reinsurers are rated "holds" -- IPC(IPCR Quote) and Montpelier Re(MRH Quote).

The one stock with a sell rating is Scottish Re(SCT Quote).

The two most exciting catastrophe reinsurers are Arch Capital and Odyssey Re. Arch, with the second-largest market cap in the sector, after Everest Re, has returned 22% year to date. Underwriting results for the first nine months of 2006 far outperformed those for the same period in 2005. Gross premiums written grew 14.8% year over year, and underwriting income grew 932.7%. The company's combined ratio -- a common industry metric measuring underwriting losses and loss expenses as a percentage of premium income -- fell to 86.3% from 98.9% year over year. We like that the company has diversified its business mix to minimize losses from natural catastrophes.

Odyssey Re is writing fewer premiums than last year, but at much higher margins. Gross written premiums for the first nine months of the year were down 15.6% compared to the same period last year, but the combined ratio was also down dramatically. Last year's third-quarter combined ratio was a whopping 145.7%, with 53.7% of that coming from catastrophe losses. But in the third quarter of 2006, its combined ratio fell to 95.8%, which included only 4.3% from catastrophic losses. We expect a further decline in the combined ratio through the end of the year.