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Reinsurers generally favoured by market conditions

Reinsurance alternates between periods of ample capacity and reduced profitability, says Chartered Financial Analyst Bryan Dooley (File photograph)

This year’s Q4 earnings reporting season has been full of surprises, both positive and negative.

Notably, companies in the AI-related technology sector, such as ARM Holdings and Meta Platforms (formerly Facebook), witnessed remarkable post-earnings price surges of 48 per cent and 20 per cent, respectively.

Meta's stock, in particular, recorded the most substantial single-session market value increment in the history of stock markets, adding a staggering $197 billion to its market capitalisation immediately following its outstanding Q4 earnings announcement.

However, amid these triumphs, other companies such as Snap Inc and PayPal Holdings experienced significant declines in their share prices in the aftermath of their earnings reports.

Bermudian reinsurer Everest Re found itself among the companies facing adverse market reactions despite surpassing consensus bottom-line earnings expectations by an impressive 72 per cent.

The company encountered its most severe one-day decline since March 2020, falling as much as 10 per cent post earnings. This downturn was precipitated by a modest revenue shortfall and, more significantly, management's surprise decision to add $392 million to its loss reserves. With 43.4 million shares outstanding, this equates to about $9 per share, yet the stock plummeted by $29 after the announcement.

The decision to bolster reserves was prompted by the inflationary impact on the accident years spanning from 2016 to 2019 in longtail lines — a challenge confronting the industry of late.

Local competitor Axis Capital Holdings Ltd similarly found itself compelled to make a comparable provision. This comes on the heels of a $400 million reserve addition in the reinsurance segment in 2021 for analogous issues.

Despite this, the segment experienced $397 million in favourable development in Q4, following cumulative benefits of a mere $10 million in the preceding 11 quarters, according to Bloomberg data.

On the revenue front, Everest's premium growth is poised to approach 20 per cent, buoyed by the favourable pricing environment in its insurance and reinsurance segments. Furthermore, fixed investment income from the investment portfolio is anticipated to continue its ascent, contributing to overall net income growth, given the prevailing higher interest-rate environment and recent portfolio adjustments.

Trading at about $373 per share (after rebounding from last week’s intraday low of $343), Wells Fargo insurance analyst Elyse Greenspan revised her one-year price target on Everest Re downwards from $484 to $402, downgrading her recommendation to "equal weight" from "outperform".

Ms Greenspan cited lingering investor uncertainty regarding the extent of adverse development in casualty lines and the potential for business written in recent years to mirror the trajectory of older accident years. She marginally adjusted her 2024 earnings per share estimate to $62.00 from $63.20, while projecting $70.00 for 2025, resulting in a forward price-earnings ratio of only 5x compared with a ten-year median ratio of 10x.

On the other hand, Keefe, Bruyette and Woods analyst Meyer Shields maintains an outperform rating on the stock and a $465 price target.

The analyst said: “We'd be buyers on EG's significant weakness, which we attribute to the reasonable sounding, but probably very inaccurate, concern that its general liability reserve additions to accident years 2016 to 2019 augur additional reserve strengthening on more recent years, since recent accident years face the same social inflation impacting the older years.”

Zooming out, market conditions have generally favoured the reinsurance sector as a whole.

Reinsurance, characterised by its cyclical nature, alternates between periods of ample capacity and reduced profitability, often followed by phases of constrained availability and increased earnings.

The year 2023 witnessed a record-setting pace of natural catastrophe events, with more than 20 separate billion-dollar disasters occurring in the United States alone. Despite the unfortunate circumstances, these events have had a positive influence on policy rates and terms, resulting in a sharp increase in earnings for the sector last year, with expectations of continuity.

From a macroeconomic standpoint, the US economy appears relatively resilient despite the Federal Reserve's assertive monetary tightening policies initiated since 2022, with a soft-landing scenario seeming probable for 2024.

Consequently, insurance pricing is expected to remain robust over the next few years, particularly as stocks in this sector trade at some of the lowest valuations relative to both the broader financial group and the overall market.

Value-style investment managers are likely watching this sector closely, even as many investors continue to pursue higher-profile names at extraordinary levels.

• Bryan Dooley, CFA, is the chief investment officer at LOM Asset Management Ltd in Bermuda. Call LOM on +1 441-292-5000 or visit www.lom.com for further information. This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult their brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority

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Published February 16, 2024 at 7:57 am (Updated February 16, 2024 at 9:38 am)

Reinsurers generally favoured by market conditions

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