Executive Summary / Key Takeaways

• Balance Sheet Surgery in Progress: Everest is aggressively excising its U.S. casualty cancer through $2.2 billion in reserve additions, a $1.2 billion adverse development cover, and exiting $2 billion in global retail insurance—actions that will either cure the patient or reveal deeper malignancy by 2026.

• Reinsurance: The Hidden Gem: The Reinsurance segment delivered an 87% combined ratio in Q3 2025 while competitors struggle with cat volatility, generating over $100 million in underwriting income from Global Specialties alone—a business that should command a premium valuation but remains obscured by insurance segment losses.

• Capital Inflection Point: The AIG (AIG) renewal rights sale and ADC transaction will release "meaningful total value" and "significant capital" according to management, funding a buyback program that has already repurchased $400 million year-to-date at prices below current book value—a clear signal of value recognition.

• Valuation Disconnect: Trading at 0.86x book value with a 2.55% dividend yield and 3.1x operating cash flow, the market prices EG as a distressed insurer despite a top-quartile reinsurance franchise and proactive remediation, creating asymmetric upside if the cleanup succeeds.

• The Social Inflation Wildcard: With 12%+ loss trend assumptions and $478 million in Q3 2025 casualty reserve strengthening, the critical variable is whether management's "1-Renewal Strategy" has truly cauterized the bleeding or if social inflation will continue to erode margins in the go-forward wholesale and specialty business.

Setting the Scene: A 50-Year-Old Insurer's Midlife Crisis

Everest Group, founded in 1973 and headquartered in Hamilton, Bermuda, spent five decades building a global underwriting franchise before confronting an existential threat: its U.S. casualty insurance business had become a black hole, consuming capital and management credibility. The company that once prided itself on balanced diversification found itself in late 2024 staring at a portfolio where legal system abuse and social inflation had rendered decades of underwriting assumptions obsolete. This wasn't a gradual erosion—it was a structural breakdown that demanded radical surgery.

The industry context underscores the stakes. Property and casualty reinsurance operates on a simple principle: underwrite risk, invest float, and survive the inevitable cat events. The real money is made in short-tail property lines where pricing discipline and modeling prowess create durable moats. Long-tail casualty, by contrast, is where insurers go to die slowly—decades of latent liability, unpredictable jury awards, and social inflation that turns actuarial models into fiction. Everest's mistake was building a meaningful casualty book just as social inflation accelerated from nuisance to structural headwind.

Management's response, launched in Q4 2024, reveals a stark strategic pivot. The "1-Renewal Strategy"—a name that sounds like consulting jargon but represents a scorched-earth portfolio purge—non-renewed $750 million in North American casualty quota share business and completed the runoff of medical stop-loss. This wasn't trimming around the edges; it was amputating a diseased limb. The creation of a new "Other" segment to house run-off operations, including the sports and leisure business sold in October 2024, asbestos and environmental exposures, and pre-2012 discontinued programs, provided financial transparency but also served as a public confession: these businesses have no future in the go-forward strategy.

Strategic Differentiation: The Reinsurance Moat vs. the Casualty Quagmire

Everest makes money through three distinct engines, each with radically different economics. The Reinsurance segment writes worldwide property and casualty reinsurance on both treaty and facultative bases, competing head-to-head with RenaissanceRe (RNR), Arch Capital (ACGL), and Hannover Re (HNRGY). The Insurance segment writes direct property and casualty, surplus lines, and specialty coverage. The Other segment is a graveyard, managing runoff and settlement of legacy liabilities.

What separates Everest from pure-play reinsurers is this integrated model—or rather, what remains of it after the transformation. The Reinsurance business operates as a true moat: treaty relationships with primary insurers create sticky revenue, while facultative underwriting allows cherry-picking of profitable risks. In Q3 2025, this segment generated $3.2 billion in gross written premiums with an 87% combined ratio, improving 4.8 points year-over-year. The portfolio mix shift tells the real story: property and short-tail lines grew 5% while casualty and financial lines shrank 10%, a deliberate retreat from the U.S. legal system abuse that CEO Jim Williamson calls "persistent."

The Insurance segment, by contrast, has become a value destroyer. Q3 2025's 138% combined ratio—driven by a 106% loss ratio—reflects not poor current underwriting but the hemorrhaging of prior-year reserves. The $478 million net reserve strengthening in Q3, primarily for accident years 2022-2024, represents management's attempt to front-run actuarial reality. Such recognition of pain now avoids death by a thousand cuts later. The 45% non-renewal rate in U.S. casualty during Q3 wasn't selective pruning; it was a mass extinction event for underperforming accounts.

The strategic differentiation lies in execution velocity. While competitors like Axis Capital (AXS) and Arch Capital also face social inflation, Everest's "1-Renewal Strategy" moves at a pace rarely seen in insurance. Since January 2024, the company shed $800 million in casualty pro rata business, with 47% of Q2 2025 casualty business not renewing. This speed creates two effects: it limits the duration of reserve bleeding, and it positions the go-forward wholesale and specialty business—historically 10 combined ratio points better than retail—to achieve the "lower half of the 90s" combined ratio that Williamson targets.

Financial Performance: The Numbers Tell Two Stories

The consolidated numbers look grim, but segment dynamics reveal the underlying narrative. Q3 2025 operating income collapsed to $316 million from $630 million year-over-year, entirely due to the $537 million unfavorable prior-year development. The group's attritional combined ratio, excluding cats and prior-year development, was a healthy 89.6%—proof that the core underwriting engine still functions. This bifurcation shows the market is punishing Everest for historical sins while ignoring the profitability of its current business.

Reinsurance is the star. Year-to-date gross written premiums of $9.7 billion grew 0.2%, but the real story is margin expansion. The Q3 combined ratio of 87% benefited from lower catastrophe losses and favorable prior-year development, while Global Specialties produced $500 million in gross premiums and over $100 million in underwriting income. Management's commentary that property cat pricing remains "still a very favorable environment" even if rates fall 10% at 1/1/2026 reveals pricing power. When competitors are cutting capacity, Everest can afford to be selective, non-renewing 20+ deals while increasing share on the most profitable layers.

Insurance is the villain, but a reforming one. The Q3 138% combined ratio includes the $478 million reserve hit, but the attritional loss ratio of 67% reflects disciplined current-year pricing. Rate increases averaging 20% across commercial auto, general liability, and excess umbrella—consistently above the 12% loss trend assumption—show management's refusal to chase unprofitable growth. The exit from $2 billion in global retail insurance to AIG, while generating a $250-350 million non-operating charge, removes a business that required ongoing capital investment and delivered inferior returns.

The investment portfolio provides crucial ballast. Net investment income rose to $540 million in Q3 2025, up from $491 million in Q1, driven by higher assets under management and strong alternative asset returns of $112 million. The book yield of 4.5% reflects a conservative allocation with significant non-U.S. dollar exposure. This income stream funds reserve strengthening without diluting shareholders—a luxury not available to smaller, less capitalized competitors.

Capital management signals confidence. Book value per share reached $366.22 in Q3, up 15.2% year-to-date adjusted for dividends. Share repurchases totaled $400 million through Q2, with management calling this activity a "floor" for future buybacks. The company had $1 billion in FHLBNY borrowings outstanding against $3.3 billion capacity, providing liquidity flexibility. Management's actions indicate the stock is cheap relative to intrinsic value, even as they acknowledge the remediation will take until late 2026 to show full capital relief.

Outlook and Execution: The 2026 Inflection Point

Management guidance frames 2026 as the year Everest emerges from transformation. The AIG transaction's capital relief will "become more visible in the back half of '26," according to CFO Mark Kociancic, while the ADC provides "finality for historical casualty reserve challenges." These aren't vague promises; they're specific milestones. The $1.2 billion ADC, covering $5.4 billion in North America insurance reserves for accident years 2024 and prior, transfers risk to Longtail Re and State National. The $122 million premium payment and expected $60 million annual drag on investment income are quantified costs of putting the past behind.

The Reinsurance outlook remains robust. Williamson anticipates "favorable" market conditions through the January 1, 2026 renewal, despite increasing capacity. His characterization of current rate levels as attractive even after a 10% decline suggests Everest has room to maintain margins while competitors who wrote business at the peak face compression. The Global Specialties business, generating $500 million quarterly, is positioned for "continued top and bottom-line growth," providing a growth engine absent from traditional reinsurers.

The Insurance transformation's success hinges on two variables: loss trend accuracy and expense leverage. Management assumes 12%+ social inflation across casualty lines, building conservatism into 2025 loss picks. If actual trends moderate, reserve releases could materialize in 2026-2027. Conversely, if trends accelerate, the ADC's $1.2 billion limit could be tested. The expense ratio, currently elevated at 18.7% in Insurance due to infrastructure investments, should improve as international operations scale without new market entry, creating operating leverage.

International insurance provides a proof point. Growing 23% in Q2 2025 and achieving "low 90s" combined ratios in mature markets like U.K. wholesale, this business demonstrates Everest can build profitable insurance operations outside the U.S. casualty minefield. Such results validate the strategy of scaling existing 12 markets rather than geographic expansion, focusing premium leverage against fixed costs.

Risks and Asymmetries: What Could Break the Thesis

The central risk is social inflation exceeding management's 12% assumption. The $537 million Q3 prior-year development, with 80% from eliminated policies, suggests the cleanup is working—but the remaining 20% indicates some current-year leakage. If U.S. casualty loss costs accelerate beyond pricing, even the "lower half of the 90s" combined ratio target for wholesale and specialty could prove optimistic. This would erode the Reinsurance segment's earnings contribution and delay capital relief.

Catastrophe volatility remains a perennial threat. The $512 million Southern California wildfire loss in Q1 2025, while within expectations, demonstrates how a single event can erase a quarter's underwriting profit. Everest's 1% market share estimate for the wildfire reveals disciplined exposure management, but climate change is increasing cat frequency and severity. If 2026 brings a major hurricane or wildfire season, the Reinsurance segment's 87% combined ratio could deteriorate rapidly, undermining the investment case.

Execution risk on the AIG transaction is material. The $250-350 million non-operating charge will depress reported earnings through 2026, potentially masking underlying improvement. If the transition disrupts client relationships or if AIG fails to renew the $2 billion premium block as expected, Everest could face both reputational damage and lost future earnings streams. Management's confidence that AIG is "ideally positioned to maximize the value of this portfolio" assumes seamless operational handoff—a big if in insurance M&A.

The Bermuda tax law change creates regulatory uncertainty. The Corporate Income Tax Act 2023, effective 2025, imposes 15% tax on certain businesses, while OECD guidance restricts utilization of deferred tax assets to 20% of calculated amounts through 2026. If Bermuda amends the law in response, Everest's deferred tax assets could be impaired, creating a one-time hit to book value. Such a development introduces a non-operating risk that could offset capital released from the insurance exit.

Competitive Context: Where Everest Stands

Against RenaissanceRe, Everest's Reinsurance segment shows comparable underwriting discipline but greater diversification. RNR's Q3 2025 combined ratio likely sits in the mid-80s, but its cat concentration creates more volatile earnings. Everest's property cat book, while exposed to events like the California wildfires, benefits from a more balanced global footprint. RNR's market share in pure cat reinsurance exceeds Everest's, but Everest's Global Specialties business—generating $500 million quarterly with $100 million underwriting income—has no direct RNR equivalent, providing a unique growth vector.

Arch Capital's specialty focus overlaps with Everest's wholesale and specialty strategy, but ACGL's scale in mortgage and credit lines creates a different risk profile. ACGL's 17.8% ROE trounces Everest's 3.6%, reflecting Arch's avoidance of long-tail casualty pitfalls. Everest's transformation aims to close this gap by jettisoning its retail business, which historically underperformed wholesale by 10 combined ratio points. If successful, Everest's go-forward insurance ROE could approach Arch's levels, justifying a re-rating.

Axis Capital and Hannover Re represent the global reinsurance competition. AXS's 20.6% ROACE and Hannover's 20.5% ROE set the profitability bar. Everest's 12.3% total shareholder return lags materially, but the gap narrows when adjusting for the one-time reserve charges. The key differentiator is execution speed: Everest shed $800 million in casualty pro rata business in 18 months, a pace that more conservative European reinsurers like Hannover would find culturally impossible. This agility could prove decisive if market conditions deteriorate rapidly.

The ILS market and insurtechs pose indirect threats. Insurance-linked securities provide cheaper cat capacity, pressuring property reinsurance margins, while AI-driven underwriting tools could erode Everest's specialty moats. However, Everest's A+ rated balance sheet and long-term client relationships create switching costs that pure capital providers can't match. The company's investment in "people and technology" for international insurance, while dragging current expense ratios, builds capabilities that insurtechs lack at scale.

Valuation Context: Price vs. Value at $313.71

At $313.71 per share, Everest trades at 0.86x book value of $366.22—an anomaly for a profitable reinsurer with an A+ rated balance sheet. The price-to-operating cash flow ratio of 3.1x and enterprise value-to-revenue of 0.65x reflect market skepticism about reserve adequacy. By comparison, RenaissanceRe trades at 1.16x book, Arch Capital at 1.48x, and Hannover Re at 2.19x. This 20-60% discount to peers implies the market assigns a 30-40% probability that additional reserve shocks will materialize.

The dividend yield of 2.55%, with a 59.5% payout ratio, provides income while investors wait for the transformation to play out. The buyback program, executed at an average price of $348 in Q1 2025, demonstrates management's view that shares are undervalued even after the 15% year-to-date book value appreciation. If the ADC and retail exit release capital as expected, buybacks could accelerate in late 2026, providing a catalyst.

Key valuation drivers for 2026-2027 include: (1) Reinsurance segment ROE reaching 15%+ if cat activity normalizes, (2) Insurance segment combined ratio stabilizing in the low-90s, and (3) Book value growth resuming its historical 8-10% pace. If these materialize, a 1.0-1.2x book value multiple would be reasonable, implying 25-50% upside from current levels. The asymmetry lies in the downside protection: even if reserves deteriorate further, the ADC caps the exposure at $1.2 billion, and the Reinsurance business alone is worth the current market capitalization based on peer multiples.

Conclusion: A Transformation Bet with Downside Protection

Everest Group's investment thesis boils down to a simple proposition: the market has conflated legacy insurance problems with core business viability, creating an opportunity to buy a top-quartile reinsurance franchise at a discount to liquidation value. The $2.2 billion in reserve charges and $1.2 billion ADC aren't signs of a dying company—they're evidence of management's willingness to confront problems head-on, a rarity in an industry famous for reserving optimism.

The critical variables are execution and time. If the "1-Renewal Strategy" has truly cauterized U.S. casualty bleeding, the go-forward wholesale and specialty business should deliver low-90s combined ratios by 2026, freeing the Reinsurance segment's earnings power to drive book value growth. If social inflation exceeds the 12% assumption or cat losses spike, the ADC provides a backstop, and the Reinsurance business's 87% combined ratio offers a margin of safety that peers lack.

Trading at 0.86x book value with a 2.55% dividend yield and aggressive buybacks, Everest offers asymmetric risk/reward. The downside is capped by the reinsurance franchise's intrinsic value and the ADC's risk transfer, while the upside depends on management delivering on its 2026 capital relief promises. For investors willing to underwrite execution risk, Everest represents a rare combination: a transformed business at a distressed price, with management's own capital allocation decisions providing the strongest vote of confidence.