Low Cat Loss Boosts RE's Earnings

Everest Re Group, Ltd. ( RE - Analyst Report ) reported first quarter 2012 operating earnings of $4.48 per share, substantially higher than the Zacks Consensus Estimate of $3.51. Results were in contrast to an operating loss of $5.95 per share recorded in the prior-year quarter. The quarter’s earnings primarily benefited from lower claims expenses along with a modest revenue increase.

Total revenue for the quarter came in at $1.25 billion, up 3.3% year over year, primarily attributable to higher net realized capital gains, partly offset by lower premiums earned and lower investment income.

Gross written premiums were $1.05 billion, down 2% from the prior-year quarter. Net investment income in the quarter decreased 15% year over year to $152.4 million, primarily due to higher investment income from limited partnerships in the prior-year quarter.

Total claims and expenses were down 42% year over year to $906.3 million., primarily led by lower incurred loss. The loss ratio in the quarter narrowed down to 60.4% from 123.6% in the prior-year quarter.

Segment Results

The company’s Insurance segment reported net premium written of $182.1 million down 21% year over year. The segment reported underwriting loss of $2.1 million same at that of prior year quarter.

The Reinsurance segment reported premium written of $834.7 million up 5.2% year over year. Underwriting gain was $111.6 million in contract with an underwriting loss of $517.7 million in the year-ago quarter.

Shareholders’ equity at the end of the reported quarter was $6.33 billion, up 4.3% sequentially. Book value per share was $120.30, up 6.5% from the end of fiscal 2011.

Share Repurchase Update

During the quarter, Everest Re repurchased 1.4 million common shares at a total cost of $125.0 million. The company is still left with 5.9 million shares under its current share buyback authorization program.

Our Take

After suffering massive huge cat losses in the past year, Everest Re got some respite from benign cat activity in the reported quarter. Management isoptimistic regarding favorable reinsurance market pricing led by the recent cat loss events. Any such development augurs well for the company, which is a big player in the reinsurance market.

Everest Re is also aggressively expanding its overseas business, accruing significantly to the overall top line in recent years. Moreover, given its conservative financial leverage measures, the company maintains strong financial flexibility with the ability to effectively manage its capital through market cycles. However, lower reinvestment rates and reserving performances are near-term headwinds to its earnings.

Everest Re currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. However, considering the gradually improving insurance market, we maintain our Neutral recommendation on the shares.

Its peer ACE Ltd. ( ACE - Analyst Report ) also reported higher year-over-year earnings benefiting out of low cat losses. Another peer, XL Group Plc ( XL - Analyst Report ) , is expected to report earnings shortly, and we expect it to perform well.