We are downgrading shares of Everest Re Group Ltd. (RE) to ‘Underperform’ from ‘Neutral’ based on concerns over soft reinsurance markets and adverse reserve developments for the past several years.
Everest Re’s history of reserve additions in eight out of the last ten years in its asbestos and environmental policies gives investors pause regarding reserving practices. During that timeframe, most peers showed robust redundancies on the balance sheet and boosted results along the way. Considering the persisting underwriting downcycle and the long-tail nature of this line, the company’s reserving performance looks doubtful.
Given the soft markets, Everest Re anticipates a flat top line in 2011. While the company expects its property line to grow, the casualty line is expected to continue declining due to the ongoing tough market conditions. The extent of increased competition and its effect on rates, terms and conditions vary widely by market and coverage, but are most prevalent in the U.S. casualty insurance and reinsurance markets.
Everest estimates its first quarter 2011 pre-tax losses to range between $140 million and $210 million, owing to the deadly February 2011 New Zealand earthquake. The Australian floods will likely cause a gross loss of another $45 million to Everest Re, which writes 7% of its Reinsurance business in the Asia/Australia region. A high incidence of catastrophe loss will drain the company’s earnings.
Everest Re’s investment portfolio has a higher proportion of investment in equities compared with its peers, which gives it a higher risk profile. While equity markets have proved to outperform bond markets over the long term, the firms believe that the added volatility associated with equity investments does not always benefit the shareholders.
However, the company’s strong underwriting skills, a multi-operating platform and a vast geographic coverage form an advantage over its peers.
Everest Re has successfully grown its international business in the Middle East, Latin America and Asia. 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, growth is also likely from the company’s development in Brazil. Since Brazil is expected to witness economic growth very soon, the company capitalizes on its recently expanded opportunity for professional reinsurers in the Brazilian market.
Everest Re has been shifting its business mix away from U.S. casualty writings to property. Its reinsurance book has switched from predominantly casualty in 2004 to predominantly property in 2010. The U.S. Reinsurance business ended 2009 at $1.17 billion, up 22% from 2008. U.S. Reinsurance’s treaty property book was a strong driver of growth and underwriting profit. The company added several new single-state programs having good pricing margins to this book. Rates are improving in this line and we expect this trend to continue, thereby helping the company’s top line to grow in the foreseeable future.
All said, we think there will be a restricted top-line growth over the near term, but aggressive share repurchases will help the bottom-line earnings.
Everest Re competes with peers like ACE Ltd.(ACE) based in Zurich and XL Group plc (XL) based in Ireland.
ACE LIMITED (ACE): Free Stock Analysis Report
EVEREST RE LTD (RE): Free Stock Analysis Report
XL GROUP PLC (XL): Free Stock Analysis Report
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