We are reiterating our ‘Neutral’ recommendation on the shares of Everest Re Group, Ltd. (RE) following its third-quarter earnings release. While the company performed strongly during the third quarter, beating the Zacks Consensus Estimates substantially, we expect the fourth quarter to be low on earnings due to the estimated loss as a result of hurricane Sandy.
Everest’s U.S. Reinsurance segment has been performing quite well. 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 will lead to meaningful and sustainable long-term growth. The company has also grown its business internationally in the Middle East, Latin America and Asia. Much of the company’s top-line growth in the past few years has come from its overseas business and the trend will continue in the future.
Everest’s combined ratio, which signifies an insurer’s profitability, has remained below breakeven levels over the past five years, reflecting its superior underwriting discipline.
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 costs under control and has successfully delivered underwriting profitability year after year.
However, the negatives include exposure to catastrophes, which causes earnings to fluctuate 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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