A few months ago, I noted that property and casualty (P&C) reinsurance companies (which take on coverage from other insurance companies looking to reduce their exposure to a particular area of the market) were performing well and recommended Everest Re Group Ltd (RE) as a result.
Picking strong stocks in strong sectors is a great investment strategy and, so far, it has paid off.
At the time of the recommendation, two other stocks in the sector — Selective Insurance Group (SIGI) and American National Insurance Company (ANAT) — were showing impressive momentum … and their momentum was thanks to two other stocks in the sector. More specifically, ACE Limited had just acquired Chubb Ltd (CB) for nearly two times book value, which I said pointed to the potential for higher multiples across the industry.
So far, that’s looking to be the case for Everest Re Group, as shares are currently around an all-time high. Add it up, and the stock has gained 14% over the last 12 months even as the broader market has dipped slightly.
Other Reasons to Consider RE Stock
Despite that run, RE stock still boasts a delicious 2.4% dividend yield, which further reinforces the bull case.
We are still in a pretty nervous market environment, and the P&C sector can offer a safe haven for investors seeking yield, but who are nervous about what higher interest rates will mean for the economy and other stocks.
Higher interest rates are actually beneficial for insurance companies, as they lift interest income.
One thing to note about Everest is that management has forecast slower growth in coming quarters thanks to weakness in reinsurance premiums and because there will be less reinsurance available to underwrite. But even considering sliding earnings and the recent run, RE stock is priced at just 10.6 times forward earnings, giving it room to heighten that multiple.
Besides, analysts are well aware of this earnings trend and have been upping their estimates for the current quarter anyway. Considering Everest is coming off a monster earnings beat, we can take those revisions to heart. In Q4, Everest posted $8.17 a share, up from $7.28 a share last year and almost $3 more than the consensus.
Management also said that they expect the strong growth to continue in 2016 and beyond. Management is shifting a bit, though, as Everest just announced a new president and CEO of its Reinsurance Division beginning this week.
Last year, 79% of RE’s written premiums were from its reinsurance business, so this is important. But the new guy comes with lots of experience, so I expect him to simply continue the momentum.
Bottom Line for Everest RE Group
I have lowered my target on RE stock a bit after the recent run, but still think there is room for upside.
Besides the sector strength, strong yield, new management and increased estimates, I also like Everest Re Group for the simple fact that it is a financially strong company and a conservative investment portfolio.
Keep an eye out; Everest Re Group reports earnings on April 25.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
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