Shift To Property And Specialty Lines Will Improve Business Resilience In Future

Key Takeaways

• Strategic portfolio shift towards property and specialty lines aims to boost underwriting profitability and enhance net margins.
  
• Strong growth in international and reinsurance markets, driven by demand and pricing, supports revenue and earnings resilience.
  
• Increased competition and adverse events could pressure profitability, while strategic exposure reductions and rising expenses may affect revenue growth and net earnings.

Catalysts

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

• The company is actively optimizing its portfolio mix by reducing exposure in North American casualty lines that are prone to social inflation and increasing its focus on property and specialty lines, where it sees higher expected risk-adjusted returns. This strategic shift is expected to increase future underwriting profitability and improve net margins.
  
• The international insurance platform is experiencing strong growth, with particular success in short-tail and specialty lines, as well as in expanding its presence in international markets. This diversified growth is anticipated to bolster overall revenue and improve the portfolio's resilience.
  
• Everest Group is leveraging recent market conditions, such as increased demand for reinsurance capacity and expected firming of property catastrophe pricing, to enhance their reinsurance business's profitability. This should positively impact their earnings as rates firm and demand persists.
  
• Strong investments in talent and systems alongside a focus on building franchise value through disciplined underwriting and best-in-class execution are expected to support sustained growth in revenue and shareholder returns.
  
• The company's outperformance in net investment income, notably nearly $500 million in the third quarter, and maintaining a high-quality investment portfolio with a short asset duration, position it well to benefit from future market conditions, impacting both earnings and total shareholder return.

Everest Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Everest Group's revenue will grow by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.7% today to 17.1% in 3 years time.
• Analysts expect earnings to reach $3.2 billion (and earnings per share of $76.08) by about January 2028, up from $2.7 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $3.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.7x on those 2028 earnings, up from 5.8x today. This future PE is lower than the current PE for the US Insurance industry at 12.9x.
• Analysts expect the number of shares outstanding to decline by 0.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.22%, as per the Simply Wall St company report.

Everest Group Future Earnings Per Share Growth

Risks

• Social inflation and legal system abuse in U.S. casualty lines could persist, increasing claim costs and potentially impacting underwriting profitability and net margins.
  
• Higher catastrophe losses from events like Hurricane Helene and Hurricane Milton may elevate risk exposure and volatility in earnings, affecting net profit margins.
  
• Growing competition in certain property market segments may exert downward pressure on premium rates, potentially impacting future revenue and profitability.
  
• The decision to reduce exposure to some casualty lines due to unattractive pricing may result in slower revenue growth or contraction in certain business segments.
  
• Investment and expense increases, especially in the international and insurance segments, might exert pressure on expense ratios and could detract from net earnings if not offset by sufficient revenue growth.

Valuation

• The analysts have a consensus price target of $424.25 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 $499.0, and the most bearish reporting a price target of just $372.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $18.7 billion, earnings will come to $3.2 billion, and it would be trading on a PE ratio of 6.7x, assuming you use a discount rate of 6.2%.
• Given the current share price of $371.02, the analyst's price target of $424.25 is 12.5% 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.