Everest Re Group (RE) has catapulted itself into the upper echelon of property and casualty reinsurance providers. Operating in five segments, including U.S. reinsurance, insurance, international and Bermuda operations, management has built a strong presence domestically and abroad. In an industry where volatility is the norm, Everest Re has maintained a steady portfolio and managed its liquidity well.
Part of The Prudential insurance business since 1973, Everest Re successfully completed its IPO in October of 1995, under longstanding (and current) Chairman and CEO Joseph V. Taranto. The company was formerly known as Everest Insurance Company, until restructuring its operations in 2000 by opening Everest Reinsurance (Bermuda) to better provide reinsurance internationally. Everest Re Group is now the publicly traded parent of the Everest Re group of companies. The reinsurance provider began spreading domestically and soon after began opening offices in Latin America and Singapore. The company now has an established presence across South America, Europe and Asia.
With a wide array of products, including property & casualty, facultative, marine & aviation, and accident and health insurance, Everest Re has diversified its business in an effort to take advantage of various geographic trends. The reinsurance Industry can hold surprises, especially when managing the impact that storms, such as Hurricane Sandy, can have on premium growth and pricing in the affected regions. However, underlying fundamentals and profitability separate the stronger providers from the weaker ones. While earnings are normally hard to predict, book value and returns on equity (ROE) tend to provide a clearer picture on a reinsurance provider’s business.
Everest Re has recently recorded strong growth in its return on equity (ROE), higher than most of its peers in the industry. The company continues to take advantage of rate increases within various business lines, and has managed share repurchases effectively. While management does not provide capital guidance, it has hinted that the board will extend the current buyback authorization. Repurchases are not unusual in this sector, as companies look to boost their ROE. One rival, RenaissanceRe (RNR), repurchased over 5% of its outstanding stock, a hefty amount for that company, in an effort to improve returns and capably deploy excess capital. In addition, paying down debt will benefit earnings per share over the near term, which Everest Re’s management group has recently mentioned as part of its focus.
While premium growth will benefit from price increases, especially in the U.S casualty lines affected by Sandy, various other international segments should see increases as well. Worker’s compensation has been improving steadily over the years and should be a positive growth factor for the company in the near term. Boasting a better combined ratio, a measure of profitability on daily operations (under 100% indicates profitability), worker’s compensation should enhance underwriting gains over the next two to three years. This will partially help offset weaker lines of business in Bermuda, and crop insurance, which has had a poor record thus far, but should pick up after a successful renewal season.
While the outlook remains rosy, there are always risk factors in the industry. Investment income is hard to come by in the current market. Diversification is key to managing risk, and competitors such as Greenlight Capital (GLRE) have a leg up on the competition when it comes to portfolio exposure. That said, Everest Re has a decent track record of portfolio performance. Maintaining a conservative approach, including investing in high-yield bonds and generous dividend-paying stocks, should help weather any unexpected market pullbacks. However, as the economy is slowly recovering, Everest Re will have pressure on its portfolio over the next few years.
The reinsurance industry is getting increasingly competitive, as larger insurance companies buy up smaller, regional ones to take strategic geographical positions. Former competitor Alterra Capital was recently acquired by Markel, a much larger insurance provider, in an effort to expand its reinsurance capabilities. Everest Re has indicated a partnership deal which is currently in the works. While management is hesitant to disclose details, the expected result could include a stronger position in auto insurance, which increases the scale of the company’s business.
All things considered, Everest Re continues to maintain solid liquidity and manage its portfolio well. While the threat of increased competition and unexpected disasters will always loom, the company seems to be positioned to handle most risks as they arise. In addition, a consistent dividend should keep investors happy for the time being, along with a growing a book value and rising ROE. For a more detailed report on Everest Re Group, including long-term analysis and forecasts, subscribers should examine our full-page report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.