The Long and Short
Improvement at Everest Re
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Everest Re (RE) has a highly stable credit profile and operating metrics have materially improved due to management’s efforts to reduce volatility in earnings and improve overall profitability. Exposure to the Russia/Ukraine conflict remains an overhang to the global reinsurance industry, but RE’s potential losses appear to be contained after taking a moderate charge in the second quarter. The long-dated RE paper offers an attractive low dollar price and a compelling risk/reward relative to the insurance peer group. The lower-rated property & casualty insurer HIG (Baa1/BBB+) has paper trading in the same part of the curve roughly 20 bp tighter than similar maturity RE bonds.
Graph 1. P&C/Reinsurance credits – BBB+ or higher ratings
Source: Amherst Pierpont, Bloomberg/TRACE Indications
RE 3.125% 10/15/52 @ 173/10yr, G+175, 5.06%, $70.29
Issuer: Everest Reinsurance Holdings Inc. (RE)
Intermediate holding company to Everest Re Group Ltd.
Amount Outstanding: $1 billion
RE is a top 10 global reinsurance operator with significant operations in traditional P&C underwriting as well – as of fiscal year 2021, reinsurance represents about two thirds of gross premiums written with insurance representing the remainder. The company generates about half of reinsurance premiums here in the US with the remainder coming from its international segment. Within the insurance underwriting business, RE boasts a fairly even split between property and casualty lines.
RE has $38.2 billion in total assets as of fiscal year-end 2021, with $23.7 billion in total policy reserves and $28.2 billion in total investments. Total revenue for last year was $11.9 billion.
Like most issuers in its peer group, RE experiences earnings volatility as a result of variable CAT losses year-to-year. RE management has been pursuing initiatives to help reduce CAT related volatility in earnings and improve profitability overall. Years where the underwriting profits are impacted by substantial CAT losses, are offset by RE’s consistent investment income performance.
The company has seen its Combined Ratio (a key measure of profitability, loss ratio plus expense ratio) improve substantially over the past several quarters and outperform its peer group over the past five years on average. RE’s combined ratio improved to 98.5% in F2021 from 103.4% in F2020, which was elevated due to the pandemic, and has remained under 100% in the three last quarters reported ending with 2Q22.
More recently, RE booked a fairly moderate $45 million loss in the second quarter to provision for exposure related to the Russia/Ukraine conflict. The nature of the charge was an incurred but not reported (INBR) liability, meaning that this is the company’s best estimate for future potential losses prior to claims being made. While subject to uncertain reserve development when claims are eventually made, this charge represents the bulk of RE’s exposure to the conflict, and likely encompasses the majority of potential losses related to the region. Management is more likely to err on the side of caution in taking the initial charge, meaning there could be reserve releases at a later date if the charge proves too conservative relative to actual claims.
Like most IG hybrid reinsurance/P&C operators, RE remains very well capitalized with S&P rating its capitalization at the AA confidence level. Statutory P&C capital and surplus was at a level of $5.8 billion as of year-end 2021 with a risk-based capital ratio of just under 400%.
RE has a solid liquidity profile and with no upcoming public debt maturities until 2037, except for a small loan balance due in the current year. The company has over $2 billion in cash and equivalents on the balance sheet as of the second quarter of 2022.
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