We are reiterating our recommendation on the shares of Everest Re Group, Ltd. (RE) at ‘Neutral’ prior to its third-quarter earnings release scheduled on October 24, 2012. While the company has shown a better-than-average underwriting performance, we remain on the sidelines due to the lack of broad-based improvement in pricing across the spectrum of business classes.
Everest’s U.S. Reinsurance segment has been performing quite well at present. Management continues to reduce casualty business to focus on underwriting profit. In its property lines business, the company is witnessing renewal rate increases.
We expect meaningful rate increases, particularly in the regions mostly affected by catastrophes. Other factors that are expected to increase reinsurance demand include higher capital requirements owing to the implementation of Solvency II in Europe.
Everest is realigning its insurance segment to emerge in those lines of businesses, which leads to meaningful and sustainable long-term growth. The company has also grown its business internationaly in the Middle East, Latin America and Asia. Much of the company’s top-line growth in the past few years have emanated from its overseas business and the trend will continue in future.
Everest’s combined ratio, which signifies an insurer’s profitability has remained at below breakeven levels over the past five years.
The company also has a liquid investment portfolio, which is of short duration maturity. The company has kept its investment portfolio conservative by investing just 10% of the total investment money in equities. A low incidence of equity in the investment portfolio will protect the company from equity market volatility.
Everest boasts a seasoned and experienced management team, which has kept operating cost under control and has successfully delivered underwriting profitability year after year.
However, the negatives include exposure to catastrophe losses, which causes earnings to fluctuate in case large catastrophe occurs and a low interest environment, which pressurizes investment income.
Everest Re currently retains a Zacks # 3 Rank, which translates into a short-term Hold rating. Its peer – Reinsurance Group of America Inc. ( RGA) – also retains a Zacks # 3 Rank and a long-term Neutral recommendation.
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