Profiting from Disasters (Responsibly)
When Hurricane Ian devastated Florida in 2022 causing $100+ billion in insured losses, primary insurers like State Farm and Allstate faced catastrophic payouts. Who backstopped their losses? Reinsurers like Everest Group. Under Juan Andrade's leadership, Everest underwrites risks primary insurers cannot retain—Florida hurricane exposure, California earthquake risk, global property catastrophe. The business model requires ice-cold discipline: charge adequate premiums for risks assumed, maintain capital buffers for worst-case scenarios, and avoid the temptation to underprice during soft markets when competitors cut rates.
Reinsurance operates counter-cyclically to broader markets. After major catastrophes deplete industry capital, rates spike as capacity shrinks—creating hard markets where disciplined reinsurers generate 15-20% ROEs. Everest's 2023-2025 environment exemplifies this: post-Ian losses drove reinsurance rates up 20-40%, while higher interest rates boost investment income on Everest's $30 billion portfolio. For investors seeking uncorrelated returns and inflation protection (premiums rise with replacement costs), reinsurers offer diversification unavailable in traditional equity/bond allocations.
Business Model & Competitive Moat
Everest operates two segments: Reinsurance (70% of premiums) sells coverage to primary insurers globally; Insurance (30%) writes direct specialty risks (aviation, marine, surety). Revenue comes from underwriting profits (premiums minus claims and expenses) and investment income (returns on premiums held as float). The $30 billion investment portfolio—invested conservatively in fixed income—generates 4-5% annual returns at current interest rates.
The competitive moat derives from capital scale, underwriting expertise, and ratings. Only reinsurers with $10B+ capital and AA- ratings can underwrite large catastrophe risks—smaller competitors cannot provide the capacity cedents (primary insurers) require. Everest's 50+ year operating history creates actuarial data and modeling expertise new entrants lack. Bermuda domicile provides tax efficiency and regulatory advantages. The moat isn't impenetrable—capital flows in/out based on returns—but incumbents like Everest maintain structural advantages in client relationships, risk modeling, and capital efficiency.
Financial Performance
- •Underwriting Profitability: Combined ratios targeting 90-95% (profitable underwriting) during hard markets
- •ROE Potential: 15-18% ROE achievable with disciplined pricing and normal catastrophe experience
- •Investment Income: $30B portfolio earning 4-5% boosts returns independent of underwriting
- •Capital Management: $14B equity supports growth while returning capital via dividends and buybacks
- •Book Value Growth: 10-12% annual book value per share growth during favorable cycles
- •Float Advantage: Premiums collected upfront create investment float, compounding over time
Growth Catalysts
- •Climate Change Severity: Increasing catastrophe frequency/severity drives sustained demand for reinsurance capacity
- •Rate Hardening: Post-2022 losses support pricing discipline and premium rate increases through 2025+
- •Interest Rate Benefit: Higher rates increase investment income on $30B portfolio by $300-500M annually
- •Capacity Constraints: Industry capital depletion limits competition, supporting pricing power
- •Emerging Market Growth: Asia-Pacific insurance penetration increases demand for reinsurance
- •Specialty Lines Expansion: Aviation, marine, cyber insurance growth creates new underwriting opportunities
Risks & Challenges
- •Catastrophe Volatility: Mega-disasters (magnitude 8 earthquake, Cat 5 hurricane) create outsized losses
- •Underwriting Discipline: Management must resist soft market temptation to underprice for market share
- •Interest Rate Sensitivity: Rate declines reduce investment income and pressure ROEs
- •Competition Cycles: New capital entering reinsurance after hard markets erodes pricing
- •Regulatory Changes: Bermuda tax/regulatory changes could impact profitability
- •Model Risk: Catastrophe models underestimating climate change losses leads to inadequate pricing
Competitive Landscape
Everest competes with global reinsurers Munich Re, Swiss Re, Hannover Re, and Bermuda peers RenaissanceRe and Arch Capital. Competition is rational during hard markets (disciplined pricing prevails) but destructive during soft markets (capital inflows drive underpricing). Everest's strategy balances reinsurance (70%) with direct insurance (30%), providing diversification versus pure-play reinsurers more exposed to catastrophe volatility.
Juan Andrade focuses on underwriting discipline and capital efficiency. During soft markets, Everest shrinks exposure rather than chase unprofitable business. During hard markets, Everest deploys capital aggressively into attractive opportunities. This counter-cyclical approach requires patience and conviction—resist pressure to grow when pricing is inadequate, then expand rapidly when margins justify risk. For investors, management's willingness to shrink during soft markets (sacrificing short-term growth for long-term profitability) separates quality reinsurers from those chasing volume at any price.
Who Is This Stock Suitable For?
Perfect For
- ✓Sophisticated investors seeking portfolio diversification beyond stocks/bonds
- ✓Value investors comfortable with cyclical, hard-to-analyze businesses
- ✓Inflation hedgers (premiums rise with replacement costs, benefiting from inflation)
- ✓Long-term holders (5-10 years) understanding reinsurance cycles require patience
Less Suitable For
- ✗Conservative investors uncomfortable with catastrophe loss volatility
- ✗Growth investors seeking revenue/earnings predictability (reinsurance is lumpy)
- ✗ESG investors concerned about climate change adaptation versus mitigation
- ✗Short-term traders (reinsurance cycles play out over years, not quarters)
Investment Thesis
Everest Group offers contrarian exposure to reinsurance hard markets and uncorrelated returns for diversified portfolios. The current environment—post-2022 catastrophe losses, rising rates, capacity constraints—favors disciplined reinsurers like Everest. Juan Andrade's team has positioned the company conservatively: strong capital base ($14B equity), diversified book (reinsurance + insurance), and underwriting discipline avoiding soft market temptations. The result? 15-18% ROE potential during favorable periods, compounding book value at double-digit rates.
The secular tailwinds are undeniable: climate change increases catastrophe severity, driving sustained demand for reinsurance. Higher interest rates boost investment income on $30B float. Emerging market insurance penetration creates new cedents requiring capacity. For investors seeking true diversification—returns uncorrelated with equity markets, inflation protection, counter-cyclical dynamics—reinsurers like Everest provide unique characteristics. Trading at reasonable valuations (1.0-1.2x book value) with 15%+ ROE potential, EG offers sophisticated investors a compelling alternative to traditional equity allocations.