Position Record
AvoidMedium convictionLapsed

Everest Group

EGNYSE

Avoid. A value trap or a mispriced cyclical hard-market reinsurer?

Thesis
The market is discounting Everest Group as a value trap due to casualty reserve strengthening, combined ratios exceeding 100%, and margin drag from Bermuda’s transition to a 15% corporate tax. However, high underlying free cash flow, deep asset backing (tangible book value), insider buying, and strong reinsurance pricing power (87% reinsurance combined ratio) suggest the business is cyclically depressed rather than structurally broken.
Key assumption
I assume that reserve changes are transitory, not systemic, by assuming that recent reserve additions represent legacy casualty cleanup rather than chronic underwriting deficiencies. I assume that reinsurance underwriting covers insurance drag by assuming that the high margin reinsurance segment (87% combined ratio) will consistently subsidize underperforming primary insurance lines until primary underwriting is re-underwritten.
What would prove me wrong
A chronic casualty "black hole": successive multi-quarter adverse reserve developments in U.S. casualty/commercial lines, showing that social inflation and bodily injury claims exceed carried loss provisions. Secondly, a rapid reinsurance cycle softening: a sharp drop in catastrophe and property treaty pricing across upcoming renewal periods, erasing the 87% combined ratio buffer.
Entry$327.16
Price at lapse$380.12
Price move+16.2%not a position
Benchmark+10.7%S&P 500
Worth avoiding−5.5 ppagainst holding the index
Stood9 months
Download Markdown
  • Provider of insurance and reinsurance. Spun off from Prudential Financial’s reinsurance subsidiary in 1990s. 2017 joined S&P500.
  • Bermuda-based reinsurance and insurance organization.
  • 4th largest non-IFRS 17 (accounting technique) reinsurance company. A+ rating from AM Best and S&P.
  • Employee satisfaction is average, with culture rating low.
  • Bermuda corporate tax law change fiscal years beginning January 1, 2025. 0% —>15%.
  • AI analyst models are neutral due to declining profit margins, reserve strengthening (setting aside more money to pay out claims) and a decline in operating income.
  • Financial strength (5): poor cash-to-debt ratio vs industry and particularly vs history. Average equity-to-asset and debt-to-equity. Debt to EBITDA is terrible vs industry and history. 5/9 F-Score and average M-Score (manipulator score). WACC>ROIC.
  • Growth (6): average growth rates. 3y EBITDA growth rate and EPS rates are negative, which is below average. EPS growth rate estimate is excellent, however revenue is expected to decline.
  • Momentum (1): overvalued RSI and poor performance.
  • Dividend and buy back: below average dividend yield and payout ratio. Average share buy back ratio is negative, while shareholder yield is good.
  • Profitability (7): EBITDA margin is terrible, and ROE at 3%. ROIC is below average. Vs historical is also not good. 4 moat score.
  • Value (8): very poor PE ratio, forward PE ratio is excellent however. Shiller PE ratio is good, while PEG ratio is below average. PS ratio is good, and PB ratio. Price to FCF is great and OCF too. EV to EBIT is terrible vs industry. FCF yield and forward rate of return are excellent.
  • Revenue has consistently increased while net income has been very inconsistent m in addition to EBITDA.
  • Debt is growing while cash is stagnant.
  • FCF and OCF growth is significant, while stock based comp is negligible.
  • ROE - WACC is inconsistent and drops some years, but rarely negative.
  • 11% dilution in 2023, otherwise buybacks (mostly in the past).
  • Total assets is rising, while total stockholders equity is stagnant.
  • 8% tax rate. $11.3B out of $17.1B revenue paid out to policyholders. $1.7B in net investment income + $15.2B in total premiums earned.
  • Insiders consistently buy.
  • DCF significantly overvalued on EPS side, but undervalued significantly on FCF side based on past growth rates, but business is very under predictable. Both undervalued when adding tangible book value (due to asset portfolio).
  • Recent earnings calls have yielded large downward price changes (5 to 10%).
  • Combined ratio above 100% for the quarter (should be below) (however reinsurance combined ratio was 87%) and net investment income is expected to lower over the next several years.

Updates (1)

The note above is unedited. Anything that changed goes below it, dated.

EG defending strong combined ratio through shrinking premiums

Neutral at roughly $375, or 0.92x book value ex unrealised losses of $407.67, on a 14.9% operating ROE. The hard-market thesis is gone: property cat renewals came in down 10% at midyear and the reinsurance segment is holding its 88.5% combined ratio by shrinking premium rather than by pricing power, so the buffer I was counting on is being defended, not earned. Casualty is not clean either, with just under $200m of North America strengthening in Q2 across most accident years, though the adverse development covers over $5.4bn of prior-year reserves now cap the legacy tail rather than leaving it open ended. What is left is a capital story instead of a cycle story, with commercial retail being sold rather than re-underwritten, over $1bn trapped in Legacy due to release, and $395m of stock bought back below book in the quarter, which is enough to justify neutral but not a position.