Everest Re Group, Ltd.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Everest Re Group, Ltd. is a global provider of reinsurance and insurance services, offering diversified risk management solutions to a wide range of clients, particularly in the property and casualty sectors.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Everest Re Group, Ltd. (RE), based in Bermuda, is a leading global provider of reinsurance and insurance solutions, offering a broad range of property and casualty (P&C) and specialty lines of insurance. Its operations are divided into two key segments:

  1. Reinsurance: This segment provides traditional reinsurance solutions, including treaty and facultative reinsurance. They engage with primary insurance companies, assuming portions of their risk to help manage potential losses from various events like natural disasters.
  2. Insurance: Everest’s insurance segment offers products like specialty casualty insurance, property insurance, and reinsurance coverages, with focus primarily on commercial markets. Their products protect companies from various types of losses, including liability, financial, and property risks.

Market Overview

  • Industry Conditions: The global insurance and reinsurance markets are intensely competitive.
  • Price Competition: Intense competition in the insurance and reinsurance industries, is driven by price, coverage, and capacity. This competition leads to pressure on premiums and profits, especially as new players enter the market.
  • Capital Availability: Access to capital is a critical factor in the industry. Insurers and reinsurers require significant capital to support underwriting activities and meet regulatory requirements, but they can also experience periods of overcapitalization, especially following periods of large profits.
  • Economic Factors: The health of the overall economy affects insurance and reinsurance demand. During economic slowdowns, premium volumes may decline as fewer people and businesses seek coverage. The industry also faces a significant risk from global inflation and interest rate changes, both of which affect the value and profitability of investments and the amount of insurance companies need to maintain in their reserves.
  • Political and Legal Factors: Insurers and reinsurers are subject to regulations and licensing laws from the U.S., states, and many foreign countries. These regulations can change, impacting their operations. Companies often need to reorient their compliance procedures, pricing methods, and risk management protocols to address new laws.
  • Technological Changes: Technology continues to be both disruptive and beneficial in this sector, with AI, cybersecurity, data mining, and telematics impacting insurance operations, product creation, risk assessments, and business strategies.

Company Strengths

  • Experienced Underwriting Team: RE boasts a highly competent underwriting and management team. They prioritize disciplined underwriting strategies and maintain long-term client relationships.
  • Diversified Operations: The company has a well-balanced portfolio of business across various geographies and segments.
    • This allows to capitalize on varied market opportunities and reduce exposure to single-event risks.
  • Financial Strength: RE maintains strong capital, reserves, and liquidity to endure the shocks in its operations and its risk. The company’s approach to maintain a conservative balance sheet and credit ratings helps them attract clients who might be wary of weaker counterparts.

Moat Rating and Justification (3/5)

Everest Re’s moat is narrow to wide, deserving a score of 3 out of 5.

  1. Intangible Assets: RE benefits from its reputation in the reinsurance market, especially with its strong brand recognition, which indicates customers choose it for its demonstrated reliability in the sector and quality of underwriting expertise. However, this advantage is limited to specific customer groups that are familiar with the company’s business. The company’s reliance on highly-skilled underwriters is a critical moat component, but if this isn’t continuously reinforced and maintained, can be a potential point of erosion.
  2. Switching Costs: Switching costs for reinsurance clients are moderately high due to strong, long term relationship building, and due to the fact that insurance policies and contracts are complex and expensive to duplicate and change. This means RE can attract and hold good clients, but it can always be chipped away by the low prices from competitors.
  3. Network effects: Network effects is not relevant for this company as its profitability or growth is not influenced by user base, but rather from its quality of underwriting, risk management, and reinsurance premiums.
  4. Cost Advantages: While economies of scale help, they are not the primary driver of RE’s moat. As RE has a good mix of new and repeat customers, its ability to attract new clients is not particularly affected by size or scale, as a strong track record helps more than anything else.

Risks that can erode the moat & business resilience

  • Catastrophic Events: RE is highly susceptible to large catastrophic events which can cause major losses to their reinsurance and insurance portfolios. The effects of weather-related events like hurricanes, earthquakes, and wildfires can dramatically impact earnings and solvency. This risk can be mitigated through reinsurance and hedging, but not completely eliminated.
  • Competition: Reinsurance and insurance businesses are fiercely competitive, requiring ongoing emphasis on quality and cost to attract and retain clients. Competitors may offer better terms, innovative products or low-cost operations that cut into RE’s market share.
  • Regulatory Changes: The insurance sector is strictly regulated. Changes in laws or regulations, or changes in approach by regulators could alter the company’s operations and profitability. The increased stringency could lead to higher compliance costs and operational burdens.
  • Interest Rate Risk: The company may experience loss if the interest rates move unfavorably. As fixed-income securities are a major component of RE’s investment portfolio, a substantial and rapid decline in rates could negatively impact returns on investment. While this can be mitigated using sophisticated risk-management strategies it is an ever present threat.

Financials In-Depth

Here is a detailed analysis of Everest Re Group’s financial health using its most recent reports:

  • Overview:
    • The analysis is based on recent 10-Q reports from March 31, 2024, and June 30, 2024.
    • RE conducts its business mainly through two segments: Reinsurance and Insurance.
    • Both revenues and profits have been volatile and inconsistent over recent years due to catastrohpic events and other externalities.
  • Revenues:
    • The group relies on gross written premiums, which vary due to reinsurance premiums, and insurance lines written, including specialty areas. These have shown growth over the past 3 quarters, but with heavy fluctuations.
      • For example, insurance lines have generally remained steady at around $1.2 billion, while reinsurance has grown from $2.7B to $3.3B and then to $3.1B over the last three quarters.
    • Net premiums are calculated by subtracting reinsurance costs, which is an important driver for RE’s revenue. These have fluctuated in recent times.
  • Expenses
    • The main expenses for the company are incurred losses and loss adjustment expenses (LAE) and the commissions and brokerage expenses. These are also a big driver in determining profitability. LAE is also dependent on several factors and their values may be skewed, therefore requires careful analysis.
      • The data shows that, LAE has had many fluctuations in the last 3 quarters. Reinsurance has had LAE of $1.9B, $1.8B and $1.6B. While, insurance segment has shown more consistency around $1.3B over the past 3 quarters.
  • Operating Profitability and Margins: * ROIC (Return on Invested Capital) can be calculated based on their income statement, specifically based on their adjusted income, and total funds invested.
    • Operating profits of the reinsurance segment have increased over time going from $0.159B to 0.477B over the last three quarters, while in the insurance segment they have grown from $0.243B to $0.361B.
      • These values are affected by premiums earned, losses incurred, as well as by interest and other expenses. The recent decline in the net income is directly related to increases in LAE.
    • EBITDA and net income have had major fluctuations, mainly due to incurred losses and changes in estimates of future losses.
  • Balance Sheet:
    • Total assets have been growing steadily, having surpassed $46B in 2023.
    • RE manages a sizable investment portfolio. This has both low-risk, and high risk investments and must be evaluated carefully.
    • The company carries substantial debt and other liabilities. These are primarily due to insurance liabilities, followed by long-term debt.
  • Liquidity and Capital Resources:
    • Everest maintains a good level of liquidity with significant assets that are easily converted into cash.
    • The group has multiple lines of credit. These are mostly structured to provide financing for reinsurance contracts.
      • For example, in May 2023, they had a credit facility of $600 million, and in 2021, $800 million, among others.
  • Tax Situation:
    • RE is a holding company registered in Bermuda, a location that has a lower tax rate. However, a substantial part of the company’s operations are still located in the US and is subjected to federal and local tax.
  • Dividend Policy:
    • RE has historically paid a dividend. The board of directors determines whether or not to pay. The dividends are not entirely guaranteed.
    • The board’s decision is dependent upon the company’s financial position, business needs, capital requirements, economic factors, and other aspects that could impact cash flow.
      • Most recently the company has increased the dividend rate at $1.65 per quarter.

Understandability Rating (3/5):

The insurance and reinsurance industry has a complex, and very particular business model that is somewhat challenging to understand, however, RE has clearly outlined most of the key drivers of its financial operations, which makes it fairly straightforward to understand. RE receives a rating of 3 for understandability.

Balance Sheet Health Rating (4/5)

RE maintains a relatively strong and stable financial balance sheet. They have a lot of diversified assets. Also, the level of debt is reasonable and manageable. However, due to the unpredictable nature of events such as catastrophes, which can heavily impact the results, it would be wise to be cautious, thereby giving a rating of 4/5.

Latest News, Concerns and Management Commentary

  • Impact of Inflation:
    • Inflation is a key concern for the company going forward. RE’s management noted that as the cost of claims increases due to inflation and social inflation, they are forced to be more selective about their risks. The company focuses on getting better returns on the risks they take.
    • RE has been managing the impact of inflation via adjusting rates in tandem with inflation, and making sure they are priced correctly. Also, management stated that they are comfortable with managing risks with higher inflation in the long run because of the built-in safeguards.
    • They believe that they are reasonably well equipped to withstand inflation by continually assessing their book of businesses.
  • Interest Rates: Higher interest rates might be a good thing in the long-run, as it might increase income from their fixed income portfolio.
  • Cyber Risks: Management noted their increased commitment to cybersecurity in recent earning calls. The company has a well-developed response plan that will address significant interruptions or breaches.
  • New Technology: Management has emphasized the role of technology and automation to improve risk assessment, efficiency, and claims processing.
    • The company is seeking to implement new technologies to improve processes in order to cut down on costs.
  • Impact of Acquisitions: RE is expected to gain more of the specialty insurance market through various acquisitions. Integration will result in new avenues for growth. Also, management aims to integrate the expertise and technology of newly acquired businesses to help the company as a whole.

Summary

Everest Re is a leading player in the reinsurance market with a narrow to wide moat primarily through intangible assets, but also with good switching costs. The company is susceptible to catastrophes, and hence its profitability can be volatile. Its management appears skilled and has been taking the steps required to steer the business correctly. The business requires constant monitoring of its finances, as well as of the industry dynamics. In this highly competitive market, strategic actions focused on value creation will be beneficial. The company’s share price has shown significant upside in the past few months but, due to high volatility, should be monitored carefully.