A Bermuda-based property catastrophe reinsurer has won the strongest recommendation from Lehman Brothers, over a host of other reinsurers worldwide.

And this month since the rating approval for Renaissance Re Holdings established at "1-buy'' was just issued, the company's share price has indicated that investors are taking that advice.

At $28 when the advice was given, the share price is now exceeding $29. That should come as no surprise, because Lehman Brothers said of the company: "It sets an example to the rest of the industry of how to successfully manage shareholder equity. Through a combination of share repurchases and higher dividends, its return on equity will substantially exceed 20 percent in the near future.'' The vote of confidence for Renaissance Re came as Lehman Brothers said that high book value growth and return of capital will drive the outperformance of RenaissanceRe's shares.

General Electric, Warburg, Pincus Ltd. and USF&G Corp. are the company's principal shareholders, owning almost three quarters of the stock in the public company.

The report said, "RenaissanceRe is perhaps the most shareholder friendly reinsurer on the Island of Bermuda. The company has operated from its inception with only the required amount of capital, enabling it to generate the highest return on equity in the Bermuda market (41 percent).

The forecast envisages the return of excess capital late this year and throughout next year as catalysts for higher valuations, with a target price of $36 by mid 1997.

It is speculated that management is likely to use a combination of share repurchases or higher dividends to manage its capital effectively.

Said Lehman Brothers: "Renaissance deserves a premium valuation to its peers considering its very favourable relative performance, driven by its sound underwriting and its prudent use of shareholder funds and appropriate capital management.

"While declining reinsurance prices should continue to negatively impact investor sentiment, we believe this will reduce in magnitude and investors will begin to more appropriately value Renaissance's very attractive franchise.'' Lehman Brothers estimate that the reinsurer's book value will have doubled from 1994 through the end of this year, while growth in aggregate limits insured will have been much slower, leaving the firm with excess capital.

The analyst's projections are that the company will continue to generate excess capital over the very short term due to its high return on equity. The forecast that the company will return a portion of the excess over the short term is advanced confidently.

The reasoning is based on the management's past actions regarding appropriate leverage and required levels of capital; the three sponsoring owners' serious desire to see the share price rise; and, management's prudent use of shareholder funds in its diversification efforts and its view regarding share valuation.

But Lehman Brothers also said they believe investor perceptions over the prospects and fundamentals of catastrophe reinsurance are likely to improve.

They said, "We disagree with the perception that catastrophe reinsurance rates will continue their downward spiral indefinitely, resulting in low current multiples.'' They believe that rates will continue downward in the short term but the decline will stop before returns fall below the cost of capital (estimated at 15 percent).

The report rationalises, "This is a market with very few players, unlike most insurance markets which are highly fragmented, and we believe it will be more rational as a result.

"Second, we believe investors will begin to recognise that returns in the catastrophe reinsurance markets are not as volatile as some may believe, ultimately resulting in upward valuations for their shares. Remember, most catastrophe reinsurance companies had excellent returns in 1995 despite the significant level of industry wide insured catastrophe losses.'' The declines in catastrophe markets should be ameliorated, it is argued, through the company's sound diversification efforts, including their expansion, through new subsidiary Glencoe Ltd., into primary property earthquake insurance in California.

Those efforts are expected to impact the company's earnings per share in 1997, because it will offer a growth market for the firm to offset industry declines. Its new product line in this respect is one that has a high ROE potential and is one in which they have a significant competitive advantage.

RenaissanceRe wrote $290 million of net premiums in 1995, and generated a profit of $162.8 million. By the end of 1995, the company had $757 million in assets and $486 million in shareholders' equity.