XL XL Fleet Corp

We are reiterating our Neutral recommendation on the shares of Everest Re Group Ltd. (RE) following the release of its second quarter 2011 results. The company posted second quarter earnings of $2.46 per share, beating the Zacks Consensus Estimate by 2 cents, on the back of higher-than-expected revenues. Results, however, suffered year over year owing to heavy catastrophe losses during the quarter.

Everest Re’s U.S. Reinsurance segment has been performing quiet well recently. Management continues to reduce casualty business in order to focus on underwriting profit. Moreover, the company is witnessing renewal rate hikes in its property lines unit. We expect meaningful rate increases, particularly in the areas most affected by catastrophes. Other factors that are expected to spur reinsurance demand include higher capital requirements owing to the implementation of Solvency II in Europe. In the United States, the new version (RMS 11) of catastrophe model has already increased PMLs (probable maximum loss) considerably. The combination of these events is likely to improve reinsurance demand going forward. We also expect Everest Re to benefit from a shift in the market trend.

Everest Re's Specialty Underwriting unit has been generating underwriting loss for the past two years. The Specialty book includes marine, aviation, surety as well as accidents and health.

The company is not quite optimistic about its business from marine and aviation as it expects minimal opportunities at present. However, the recent BP loss and Griffin loss should create some opportunities in the energy sector going forward.

Surety is the steady book for the segment; but, given the lack of construction in the U.S., this book cannot meaningfully add to the segment’s revenue.

The Specialty segment’s biggest division is accidents and health, and its main product is medical stop loss. Management believes that it will be able to continue expanding its writings in this sector, especially as the new healthcare bill increases the need for this product. The results for the first half of 2011 reflect an underwriting profit, and we believe the segment would post underwriting profit for full-year 2011 with the prime contribution from accident and health lines.

Everest Re has grown its business in the Middle East, Latin America and Asia. Rate increases, beginning last year in Latin America and continuing into this year in Australia, New Zealand and Japan, are likely to cause more positive attritional results. We have noticed that much of the company’s top-line growth in the past few years have emanated from its overseas business.

Everest Re is also realigning its Insurance wing in order to capitalize on those business lines that would allow a meaningful and sustainable long-term growth. This includes expansion into short-tail crop insurance lines. However, it would take some time for the segment to start contributing substantially, as the competitive casualty markets counter earnings from short-tail specialty lines. 

Moreover, a low interest rate environment will suppress investment income. Also, the company’s reserving practices, which saw additions in eight out of the last ten years, is also a cause of concern. Considering the persisting underwriting downcycle and the long-tail nature of this line, the reserving performance of the company looks doubtful.

Hamilton, Bermuda-based Everest Re competes with peers like Zurich-based ACE Ltd. (ACE) and Ireland-based XL Group plc (XL).

 
ACE LIMITED (ACE): Free Stock Analysis Report
 
EVEREST RE LTD (RE): Free Stock Analysis Report
 
XL GROUP PLC (XL): Free Stock Analysis Report
 
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