Yahoo Finance Seeking Value in Bermuda: Everest Re Group
- By Mark Yu
Everest RE Group (RE), the $10.5 billion Bermuda-based insurer, reported 19.5% revenue growth to $1.48 billion and 70% profit growth to $291.6 million in the first quarter, resulting in 19.6% profit margin compared to 13.8% in the same period last year.
Costs and expenses climbed 7.6% while income tax expenses multiplied by nearly nine times to $46.8 million in the recent quarter. Nonetheless, the insurer still delivered strong overall profitability.
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The intrinsic value of RE
"We are starting out 2017 with a very strong quarter - providing a 13% operating return on equity and a 77% increase in net income earnings per share. We continue to see strong momentum across our underwriting operations, with opportunities in both reinsurance and insurance. This growth is not coming at the expense of margin as we hold fast to our underwriting principals, which are focused on sustained profitability regardless of the market cycle. This strategy coupled with the returns we are achieving on our growing investment portfolio are providing for the strong results we saw in the quarter." - President and CEO Dominic J. Addesso
Valuations
Everest is undervalued compared to its peers in terms of earnings multiple. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 9.5 times vs. the industry median 12.5 times, a price-book (P/B) ratio of 1.4 times vs. the industry's 1.07 times and a price-sales (P/S) ratio 1.76 times vs. the industry's 1.46 times.
Everest also had a trailing dividend yield of 1.93% with 18% payout ratio.
Average 2017 revenue and earnings-per-share expectations indicated forward multiples of 1.89 times and 12.4 times.
Total returns
Everest has outperformed the broader Standard & Poor's 500 index in the past decade with 10.5% total returns vs. the index's 7.3% (Morningstar). So far this year, the company has provided 19% gains to its shareholders compared to the index's 9.5%.
Everest RE Group
Everest RE Group is a Bermuda company that was established in 1999 as a wholly owned subsidiary of Everest Reinsurance Holdings.
On Feb. 24, 2000, a corporate restructuring was completed and Everest became the new parent holding company of Everest Reinsurance Holdings. The Everest Holdings continues to be the holding company for the Everest's U.S.-based operations.
In review, Everest Reinsurance Holdings was established in 1993 to serve as the parent holding company of Everest Re, a property and casualty reinsurer formed in 1973 (1).
Everest's principal business, conducted through its operating segments, is the underwriting of reinsurance and insurance in the U.S., Bermuda and international markets.
The company had gross written premiums* in 2016 of $6.0 billion with approximately 70% representing reinsurance and 30% representing insurance.
* Gross written premium: the total premium (direct and assumed) written by an insurer before deductions for reinsurance and ceding commissions. Includes additional and/or return premiums. (International Risk Management Institute Inc. IRMI)
Everest underwrites reinsurance both through brokers and directly with ceding companies, giving it the flexibility to pursue business based on the ceding company's preferred reinsurance purchasing method. The company underwrites insurance principally through brokers, surplus lines brokers and generalagent relationships.
Everest had the following segments gross written premium: U.S. Reinsurance, international operation, Bermuda operation and insurance operation.
U.S. Reinsurance
The U.S. Reinsurance operation writes property and casualty reinsurance and specialty lines of business, including Marine, Aviation, Surety and A&H business, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies primarily within the U.S.
In the recent quarter, U.S. Reinsurance gross written premium grew by 7.9% to $579 million (36% of total written premiums) and delivered underwriting gain** margin of 17.8% (most profitable among all segments) compared to 22.2% in the same period last year.
** Underwriting gains over gross written premium.
In review, U.S. Reinsurance's incurred losses and loss adjustment expenses climbed by 10.8% to $262 million, which dampened the segment's underwriting gains. The segment's revenue increase, meanwhile, was primarily due to an increase in the new crop reinsurance business and the increase in treaty casualty and surety business.
In the recent quarter, U.S. Reinsurance's combined ratio*** was 78.6% (higher) compared to 75.5% in the same period last year.
*** Combined ratio is the sum of the loss ratio and underwriting expense ratio.
International operation
The international operation writes foreign property and casualty reinsurance through Everest Re's branches in Canada and Singapore and through offices in Brazil, Miami and New Jersey.
International operation revenue in the recent quarter grew 13% to $266 million (16.6% of total written premiums) and reported an underwriting margin of 13.7% compared to 13.1% in last year's first quarter.
According to filings, the rise in revenue for Everest's international business was primarily due to business increases in Middle East, Latin America, Singapore and Canada and the positive impact of $11.6 million from the movement of foreign exchange rates.
In the recent quarter, combined ratio of international operations was 86.6% (lower) vs. 87.7% the same period last year.
Bermuda operation
The Bermuda operation provides reinsurance and insurance to worldwide property and casualty markets through brokers and directly with ceding companies from its Bermuda office and reinsurance to the United Kingdom and European markets through its U.K. branch and Ireland Re.
In the recent quarter, written premiums in Bermuda grew 56.8% to $321 million (20% of total written premiums) and delivered a margin of 12.1% vs. 11.6% in the same period last year.
According to filings, the very strong 56.8% revenue rise was primarily due to increased casualty and financial lines of business written through the Bermuda office. Nonetheless, the segment had a 15% increase in its incurred losses and loss adjustment expenses, a 17% rise in commission and brokerage that therefore led to lower underwriting margin.
In the first quarter, combined ratio for Bermuda operations was 83.5% (lower) compared to 87.8% in the same period last year.
Insurance operation
The insurance operation writes property and casualty insurance directly and through brokers, surplus lines brokers and generalagents within the U.S. and Canada.
Written premiums in the insurance operations grew 15.5% to $434 million (27% of total written premiums) and reported underwriting gains of $5.1 million (1.2% margin) compared to $2.9 million in losses the same period last year.
In review, Everest's insurance operations have generated underwriting losses in the recent three fiscal years.
According to filings, the increase in premiums was primarily driven by expansion of various insurance lines of business, increases in accident and health business and premium from the startup of the Lloyd's syndicate.
In the first quarter, the combined ratio for insurance operations was 98.4% (lower) vs. 101% in the same period last year. The insurance operation has the highest combined ratio in the group similar to having the least profitable (if any).
Sales and profits
Everest had three-year sales growth average of 0.9%, a profit decline average of 7.5%, and a profit margin average of 18% (Morningstar).
Cash, debt and book value
As of March, Everest had $468 million in cash and $633 million in debt with debt-equity ratio 0.08 times - slightly lower than the same period last year. The insurer reduced its debt by $5.1 million while having increased its equity by $507.6 million.
In review, Everest's book value grew by 6.5% to $8.3 billion on a year-over-year basis.
Cash flow
In the recent quarter, cash flow from operations increased by 1.7% to $381.8 million. Meanwhile, capital expenditures were negligible leaving the insurer with similar amount in free cash flow.
Nonetheless, Everest performs several investing services that require prudent cash flow allocations. The insurer allocates and receives proceeds from fixed maturities, equity securities, short-term investments, unsettled securities and other invested assets.
Of Everest's cash flow from operations 15% were allocated for dividend and share buybacks for the period. On average, the insurer had a cash flow payout ratio of 44%.
In review, Everest repurchased 2.1 million shares for $386.3 million in the open market during 2016 and through the first quarter of 2017. In gross estimation, this indicates the company was able to repurchase its shares at an average price of $184 per share, significantly lower than Wednesday's price of $254.31 per share.
As of March 31, the insurer had 2 million shares remaining under its $30 million share repurchase authorization.
Conclusion
Everest presented strong overall growth in all of its segments, resulting in higher profits for its shareholders. Also, the insurer's second highest revenue generating business, insurance operations (discussed above), was able to generate some minimal earnings at least for the recent quarter after having continuous losses in the past three fiscal years.
In addition, the insurer exhibited strong cash flow generation and a balance sheet with limited amount of borrowings.
Meanwhile, seven analysts have an average price target of $258.57 a share - 1.3% higher than $255.26 (share price at the time of writing). Using three-year P/S multiple and revenue growth averages followed by a 20% margin application indicated a value of $6.9 billion or $167 per share.
In summary, Everest is a hold with $247 value per share.
Notes
1. Other significant changes in Everest's corporate history were not included in this article.
Disclosure: I do not have shares in any of the companies mentioned.
This article first appeared on GuruFocus.
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The intrinsic value of RE
