Portfolio Shift And Underwriting Will Create A Promising Insurance Future

Key Takeaways

• Strategic portfolio shift towards high-margin lines and disciplined underwriting improve net margins and reduce unexpected losses over time.
  
• Share repurchases and international market expansion enhance shareholder value and support future revenue growth.
  
• Susceptibility to natural disasters, elevated attritional loss ratios, and macroeconomic pressures could compress margins and impact revenue growth and profitability.

Catalysts

Through its subsidiaries, provides reinsurance and insurance products in the United States, Europe, and internationally.

• Everest Group is strategically shifting its portfolio towards higher-margin property lines, with property premiums growing by 16%. This indicates a focus on segments with better risk-adjusted returns, which should positively impact future revenue and net margins.
  
• The ongoing focus on attritional loss ratios and conservative risk margins suggest a disciplined underwriting approach, which should help improve earnings by reducing unexpected losses over time.
  
• Share repurchases of $200 million in the first quarter reflect a commitment to returning value to shareholders and may enhance earnings per share (EPS) by reducing share count, assuming this buyback activity continues.
  
• The remediation of the U.S. casualty portfolio, which is expected to complete by Q4 2025, aims to achieve target profitability with casualty rate increases averaging 20%. This could lead to improved net margins and earnings once the changes are fully implemented.
  
• Strengthening relationships with key international markets, such as Japan, and continued investment in the international insurance business, which showed profitability despite investments in people and technology, should support future revenue growth and market expansion.

Everest Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Everest Group's revenue will decrease by 0.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.8% today to 21.3% in 3 years time.
• Analysts expect earnings to reach $3.7 billion (and earnings per share of $69.2) by about May 2028, up from $841.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 5.0x on those 2028 earnings, down from 17.4x today. This future PE is lower than the current PE for the US Insurance industry at 14.4x.
• Analysts expect the number of shares outstanding to decline by 2.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.27%, as per the Simply Wall St company report.

Everest Group Future Earnings Per Share Growth

Risks

• The combined ratio of 102.7% is elevated, impacted by catastrophic events such as the California wildfire, which may indicate ongoing susceptibility to natural disasters and affect net margins.
  
• The company's reinsurance and insurance segments face pressure from elevated attritional loss ratios, partly due to aviation losses, which could impact future profits and net margins.
  
• Casualty lines are experiencing abundant capacity and sticky ceding commissions, resulting in premium shrinkage, which could reduce revenue growth in those sectors.
  
• Pricing pressure in international property lines and persistent competition, especially in the Japanese market, can compress margins and affect revenue.
  
• External macroeconomic factors like tariffs could lead to upward pressure on loss cost trends and inflation, potentially affecting profitability and expenses.

Valuation

• The analysts have a consensus price target of $397.423 for Everest Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $489.0, and the most bearish reporting a price target of just $330.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $17.5 billion, earnings will come to $3.7 billion, and it would be trading on a PE ratio of 5.0x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of $344.61, the analyst price target of $397.42 is 13.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.