If Everest Re Can Ease Investor Doubts About Reserves, These Shares Should Do Well

The performance of Everest Re (RE) over the last few years has been interesting to follow. While this generally well-regarded insurer has generated double-digit compound book value growth since the mid-90s and through-cycle ROEs of 10%, the shares have lagged peers like Arch Capital (ACGL), Chubb (CB), RenRe (RNR), and W.R. Berkley (WRB) over that time.

I think some of this underperformance is due simply to Everest's greater exposure to reinsurance - a business that has seen significant capital inflows push down returns, even as Everest has shifted away from property reinsurance and toward casualty/specialty. I also think, though, that there are lingering concerns about the reserves, as Everest was an aggressive underwriter of primary insurance during a soft market, and many other insurers have had to take action to shore up those reserves.

Management adjusted its reinsurance reserves in the fourth quarter, but didn't meaningfully touch the insurance reserves, and I think at least some investors are going to hold off a bit longer waiting for the other shoe to drop. I do think that Everest Re is undervalued on a long-term core earnings growth rate around 5%, but investor sentiment/confidence is a big deal with insurers, so it may take a more concerted effort from management to convince the Street that the back book is solid.

 

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If Everest Re Can Ease Investor Doubts About Reserves, These Shares Should Do Well