The latest Q4 earnings reporting season has brought its share of surprises for the reinsurance industry, with analysts sharing their insights.
Bermudian reinsurer Everest Re experienced a notable market reaction. Despite outperforming bottom-line earnings expectations by a significant 72%, the company saw its sharpest one-day drop since March 2020, with shares falling up to 10% following the earnings announcement.
This decline was triggered by a slight revenue miss and, more notably, management’s unexpected decision to increase loss reserves by $392 million due to inflationary pressures on claims from the accident years 2016 to 2019.
As per a report from the Royal Gazette, this move to augment reserves reflects broader industry challenges, with local peer AXIS Capital Holdings making a similar adjustment. Despite these developments, Everest Re’s Q4 saw $397 million in favorable reserve development, a stark contrast to the modest $10 million cumulative benefit seen over the previous 11 quarters, highlighting the volatility and unpredictability within the reinsurance sector.
Everest Re’s revenue outlook remains positive, with premium growth expected to near 20%, driven by favorable pricing conditions in both insurance and reinsurance segments. Additionally, the company anticipates continued growth in fixed investment income, benefiting from the current higher interest-rate environment and recent adjustments to its investment portfolio.
The stock’s valuation has also seen adjustments from analysts in light of these developments. Wells Fargo’s insurance analyst Elyse Greenspan has revised her one-year price target for Everest Re from $484 to $402 and downgraded the stock to “equal weight.”
In addition, Greenspan’s revised outlook stems from ongoing investor concerns over potential future adverse development in casualty lines and the performance of more recent business years. Despite these adjustments, Keefe, Bruyette, and Woods analyst Meyer Shields maintains an outperform rating, suggesting the stock’s significant weakness as a buying opportunity.
The reinsurance sector, known for its cyclical nature, has generally benefited from market conditions, including a record number of natural catastrophe events in 2023. These events have positively impacted policy rates and terms, boosting earnings for the sector, with expectations for continued strength.
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