We are upgrading our recommendation on the shares of Everest Re Group Ltd. (RE) to Neutral from Underperform as we believe the company would benefit from the gradually improving reinsurance rates after heavy catastrophe losses (cat losses) that strained capital across the industry in the first half of the year.
We expect meaningful rate increases, particularly in the regions mostly affected by these events. Other factors that are expected to drive heightened demand for reinsurance include higher capital requirements from the implementation of Solvency II in Europe. In the United States, the new version (RMS 11) of catastrophe model (cat model) has increased probable maximum loss (PML) considerably. The combination of these events will likely improve the reinsurance demand going forward. We expect Everest Re to benefit from a shift in the market trend.
Everest Re continues to benefit from its strong underwriting skills, a multi-operating platform, and a vast geographic coverage. We believe the company’s excellent reputation and solid diversification of its product lines, geography and distribution are advantageous over its peers. Moreover, the company carries a strong financial strength rating of 'A+' by both A.M. Best and Standard & Poor’s. A.M. Best also carries a stable outlook, attesting the company’s solid core operating fundamentals.
Everest Re has grown its business in the Middle East, Latin America and Asia. Rate decreases in the international markets have generally been less pronounced than in the U.S. markets. We have noticed that much of the company’s top-line growth in the past few years have emanated from its overseas business. Going forward, the company is likely to post growth from its development in Brazil. Since Brazil is expected to witness an economic growth very soon, the company capitalizes on its recently expanded opportunity for professional reinsurers in the Brazilian market.
We expect Everest Re to benefit from its capital adequacy, financial flexibility, good long-term operating performance and traditional risk management capabilities. The company’s compound annual growth rate (CAGR) of book value per share has been 13% since its 1995 IPO. Besides, the company has achieved an average shareholder’s return of 12% since 1995 and 16% since the corporate restructuring in 1999. Everest also continues to return wealth to its shareholders from time to time, primarily through share buybacks and dividends.
However, Everest Re is facing a headwind in the form of lower reinvestment rates. Also, the company has a history of reserve additions in eight out of the last 10 years in its asbestos and environmental policies. During this timeframe, most of its peers showed robust redundancies on the balance sheet, which boosted their results along the way. Considering the persisting underwriting downcycle and the long-tail nature of this line, the reserving performance of the company looks doubtful.
Bermuda-based Everest RE competes with other reinsurers like PartnerRe Ltd. (PRE), RenaissanceRe Holdings Ltd. (RNR), and Montpelier Re Holdings Ltd. (MRH) in the home turf.
MONTPELIER RE (MRH): Free Stock Analysis Report
PARTNERRE LTD (PRE): Free Stock Analysis Report
EVEREST RE LTD (RE): Free Stock Analysis Report
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