We are downgrading our recommendation on Everest Re Group Ltd. (RE) to Underperform.
Everest Re has recently announced its initial loss estimates from the earthquake in Chile and the European Windstorm Xynthia. The losses are substantial. The company expects to incur $225 million of losses for the earthquake in Chile and around $25 million for the Windstorm Xynthia.
Everest Re’s loss estimates are net of tax and reinstatement premiums. The company said that it was too early to get a clear picture of its customers’ underlying losses from the two events, and that estimates may change with further information.
Everest Re reported fourth quarter earnings of $3.19 per share, which missed the Zacks Consensus Estimate of $3.38. The miss was primarily due to a $92 million of prior year reserve additions in the quarter.
Approximately $49 million of the charge came from the insurance unit from two run-off programs that ended back in 2007. The balance of $43 million was in reinsurance, from both domestic and international property lines, where the company experienced a higher-than-expected level of late reported losses.
Estimate Revision Trends
Following the announcement of preliminary losses, 5 of the 8 analysts covering the stock have lowered their estimates for the first quarter of 2010, while no upward revisions were witnessed. For the full year 2010, 8 out of 10 analysts have revised the estimate downward and none have made any upward revisions.
Magnitude of Estimate Revisions
Estimates for the first quarter fell significantly from earnings of $3.10 to a loss of 63 cents since the preliminary loss estimates’ announcement. The estimates for the full year 2010 also moved down from earnings per share of $11.89 to $8.45.
The estimate revision trends, magnitude of revision and lack of any upward revision of estimates clearly depict the likelihood for significant downward pressure on the stock over the near term. This indicates why it is not worth keeping Everest Re’s shares in the investment kitty. As such, Everest Re’s shares have a Zacks #5 Rank, which translates to a short-term ‘Strong Sell’ recommendation.
In terms of earnings surprises, we noticed that earnings missed estimates in three out of the last four quarters, with a four-quarter average of a negative 1.5%. This implies that Everest Re has missed the Zacks Consensus Estimate by 1.5% over that period.
Currently, there is no upside potential for the estimate for the first quarter (essentially a proxy for future earnings surprises) and earnings are expected to be in line with the Zacks Consensus Estimate. The downside potential for the estimate for the full year 2010 currently stands at 3.8%.
Everest Re an Underperformer
However, the company’s solid diversification of product lines and its strategy of shifting its business mix towards property line, where rates are improving, from U.S. casualty writings and targeting international markets augur well.
In spite of this, we think that, going ahead, the casualty line and marine books are expected to decline due to tough market conditions. Additionally, the potential for future reserve additions also remains a challenge. Hence, we have changed the long term recommendation to Underperform.
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