Should you buy, hold or sell Everest shares?
Everest Group shares are trading at 0.9x Price to Book while we believe the business can sustainably generate ROE of 13% to 15% over the coming years, offering a compelling upside to investors.
A dividend payout of 15% to 20% on normalised earnings currently yields 2.4%.
The retained earnings of 80% to 85% help grow the book value per share at a rate of 10% to 13% per annum. In the absence of a multiple re-rating, we expect these two components to drive mid-teen returns for shareholders per annum over the medium term.
While ROE has averaged 7.4% in the pre-COVID period, the much higher interest rate environment supports a higher ROE going forward, all else being equal.
What Everest does
Everest Group is one of the largest global reinsurance companies. It is headquartered in Bermuda and listed on the New York Stock Exchange.
Everest has been operating for 50 years through subsidiaries in the US, Europe, Singapore, Canada, Bermuda and other territories.
Strategy and outlook
By spreading risk across a global portfolio, reinsurers enable primary insurers to underwrite more policies with confidence.
When disasters strike-whether hurricanes, wildfires, or financial crises- reinsurers help the system remain resilient, safeguarding economies and policyholders alike.
Reinsurers, just like primary insurers, generate income from two main sources - premiums written and income on investments.
Premiums written offer reinsurers a differentiated source of income - teams of actuarial scientists help work out the likelihood of insurance events that have no correlation with the business cycle.
A cyclone strikes regardless of whether the US economy is in a recession or not. The underwriting gain (or loss) is the profit generated from premiums written after paying out claims and operating costs.
The ratio of claims and costs over premiums written has averaged 98% for Everest Group since 2016 - not the best in class but still profitable (anything below 100% suggests a profit).
Investment income is the income reinsurers generate on their assets.
When insurance premiums are written, a reinsurer invests the cash proceeds into investments that help generate additional income and is an important component of overall returns.
Most of Everest Group's investment assets are safe, liquid, investment grade fixed income securities with a relatively low duration of 3.5 years.
The greatest risk for any insurance business is the potential for higher-than-expected claims from major events, which can significantly impact the balance sheet.
Everest Group mitigates this by adjusting underwriting premiums to reflect changing risk conditions. Short cycle-renewal periods ensure that the market can quickly recalibrate premiums based on updated actuarial data.
Returns
Since March 2020 the company has delivered an 18% annualised return primarily driven by improved ROE on the back of higher interest rates and a price to book re-rating from 0.7-0.9, while also paying a dividend yield of 2.5% per annum.
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