This ‘Reinsurance’ Stock Is Growing Too Fast to Be This Cheap. It’s Time to Buy.
Everest Group, at around $378, trades for just six times estimated 2024 earnings of $62 a share It has one of the lowest price/earnings ratios in the S&P 500 index.
For insurers, it’s all about getting appropriately paid for risk. And for investors, reinsurer Everest Group looks like a risk worth taking.
Everest is the world’s fourth-largest property and casualty reinsurer, which means it sells insurance to other insurers, against many types of risks including catastrophes like hurricanes and earthquakes. It has an impressive record of growth and profitability in recent years. The company, along with other reinsurers, is capitalizing on a “hard market,” or a period of higher premiums on catastrophe and other policies. Net written premiums are expected to rise 12% this year to $15 billion, double the 2019 level.
The shares of the Bermuda-based company reflect little of that. The stock, at around $378, trades for just six times estimated 2024 earnings of $62 a share and for less than 1.2 times book value of $328 a share on June 30. Everest has one of the lowest price/earnings ratios in the S&P 500 index.
“It’s not going to sell at a six multiple forever,” says Scott Black, the founder and president of Delphi Investments and a member of the Barron’s Roundtable.
Black, whose firm holds Everest stock, says the low valuation is inconsistent with the company’s returns. Financial companies with rock-bottom valuations like Everest normally have weak returns. But Everest has put up nearly 20% return on equity so far this year after a similar return last year, higher than what is being generated by most banks and insurers. It’s even higher than Berkshire Hathaway, which has a return on equity of less than 10% from operating profits. Everest’s dividend yield is 2%.
Everest, like all insurers, earns money in two ways: insurance underwriting and investments. The company has been a solid underwriter, with a “combined ratio”—losses and expenses as a percentage of premiums—of about 90% in the first half of 2024, which corresponds to a 10% underwriting profit margin. Its three-year goal is to continue to operate at a similar level of profitability.
Investment income has also been rising and is now running at more than a $2 billion annual rate as the company reinvests proceeds from maturing low-rate bonds into higher-yielding securities. The portfolio has a high average credit quality of double-A and an average maturity of about four years, which limits rate risk.
Under its CEO Juan Andrade, who has been at the helm for more than four years, Everest has reduced its risk from natural disasters. It has also built up its primary insurance business, which is viewed as superior to reinsurance. The company now has 75% of its revenue from reinsurance and 25% in traditional insurance.
A veteran of industry leader Chubb, Andrade, 58, said on the company’s second-quarter earnings conference call that Everest is capitalizing “on opportunities where market conditions are most attractive and where we can achieve sustained profitable growth.”
He added the company is delivering “industry-leading financial returns” as measured by growth in book value excluding changes in the value of Everest’s investment portfolio.
KBW analyst Meyer Shields projects that book value could top $350 a share at year-end 2024 and hit $410 a share by the end of 2025. He sees earnings rising about 10% next year to $67.45 and $74 in 2026 as profitability increases.
“It’s a well-managed company and the valuation doesn’t reflect that,” Shields says. He has an Outperform rating and $438 price target.
The stock, however, is up only 7% this year, trailing those of peers such as Arch Capital Group and Renaissance Holdings, which have risen about 41% and 25%, respectively, in 2024.
Everest’s low valuation and lagging stock appear to reflect a few factors. The company surprised Wall Street by adding to its loss reserves in the fourth quarter, and it pushed back the timing of a financial target for its insurance segment when it reported its second-quarter results. It now expects to generate a 90% to 92% combined ratio in that segment in 2025 rather than this year, when it is expected to be in the 93% area. The company has cited the expenses related to its international expansion. Investors, Shields says, “are waiting for a clean quarter” without any issues.
Then there are concerns that the current hard market for insurance pricing will erode. And reinsurers have smaller moats, or competitive rings, around their business than many other financial companies, given capital from alternative sources, like catastrophe bonds, that can enter the market.
Black says investors are also fearful of hurricanes and other storms, which are most likely in the current quarter. Climate change appears to be exacerbating that risk.
The company says its exposure to Southeast U.S. wind risk, stemming mainly from hurricanes, has fallen since 2017 to 8.4% of equity for a storm that has a 1 in 100 chance of occurring in a given year, down from 11.6%. If no major storms occur in the current quarter, the stock could get a lift.
Shields says that Everest could generate a double-digit return on equity even with a major storm. That’s due to higher catastrophe insurance rates and the tighter terms on its policies.
Everest is aiming to post compound growth in total shareholder returns of 17% annually—mostly stemming from higher book value—from 2024 through 2026. If that happens, the stock could be 50% higher by the end of 2026. And downside seems limited given Everest’s steadily rising book value.
You gotta like those odds.