In contrast to the widely-touted view of a “U-shaped” market with reinsurance rates lagging primary and retro rates, Everest Re’s reinsurance CEO John Doucette believes the better characterisation is a “W-shape” reflecting a mixed reinsurance market.
On Everest Re’s earnings call today, Doucette also revealed Everest increased retro premiums 25 percent at 1.1.
He described an overall improving market, marked by increasing demand for reinsurance with roughly flat reinsurance supply. He said Everest cut back on poor performing accounts or accounts which did not have strong pricing.
Ahead of 1.1 – which represents about 50 percent of Everest’s reinsurance premium – the company utilised alternative capital to take advantage of the improving market. It renewed its expiring Kilimanjaro bonds and utilised the $819mn of assets under management in its Mt Logan collateralized reinsurance vehicle as of 1.1, which was down from $940mn at the mid-year point of 2019.
Everest also deployed more capacity in retro through reviving its Purple product.
“There’s been a lot of discussion of the U-shape market pricing dynamics. I think the correct analogy is a W-shape,”’ Doucette said. “Why W-shape and not a U-shape? Both exhibit increasing primary and retro rates but in the U-shape model reinsurance rates would not move up much at all. However, the reinsurance rates, terms and conditions were mixed, some disappointingly flat and some with nice improvements and continued attractively priced opportunities. That is why we believe a W-shape is a better visualization of the market.”
Doucette explained the left side of the W-shape model is primary insurance. “We are directly benefiting from improving primary markets in casualty, property and specialty lines, particularly in E&S and in certain capacity-restricted territories such as Canada,” he said.
The middle part of the W-shape model is reinsurance, where Doucette said results were mixed. He identified positives as global reinsurance programmes, pockets of casualty, mortgage, structured business, many facultative lines and several loss-affected areas, while disappointments included several smaller capacity programmes and several cat-free territories.
Doucette said Everest at 1.1 was able to improve the profitability of its global cat book.
“Specifically, at 1 January several large global property programs that tapped out capacity had improved pricing,” he said. “Therefore, we wrote more with several large multinational global clients, particularly with our strategic partners. Loss-affected territories impacted by catastrophes over the last three years have substantially better rates, and in some cases those rates continued to improve.”
In contrast, smaller limit programs, including regional US and smaller clients around the globe, did not see much rate movement. Doucette said most of Europe and much of Latin America and Asia were close to flat. Everest deployed less capacity in China, for example.
The right side of the W-shape model is retro.
“At 1 January, retro rates were up meaningfully and we wrote more premiums accordingly,” Doucette said. “We dusted off our pillared product, Purple, and marketed that beyond the few core clients who have been consistent buyers. The end result was roughly a 25 percent increase in our combined retro and Purple premium.”
He concluded: “Therefore, improving insurance, mixed reinsurance with some bright spots and improved retro results in the W-shaped market. As we look forward to 2020, we see 1 January momentum continuing throughout the year on reinsurance and retro, including upward pricing pressure both in Japan at 1 April and also in Florida at 1 June. Trapped capital and investor fatigue continue as important drivers in the property space.”
In casualty reinsurance, Doucette identified better pricing. He noted a lot of market talk about social inflation and increased loss trends. “We believe this is a reversion to the long-term mean as opposed to something new,” he said, adding that Everest has been pricing for that for several years.
“We see a mixed casualty reinsurance market continuing in 2020, with some reinsurers writing more and some are treating or less,” Doucette said. “This is a function of perception of loss trends, market share and underwriting actions taken over the last several years.”
Everest share price reaches peak
Everest yesterday reported after-tax operating income of $130.8mn in the fourth quarter compared to an operating loss of $236.9mn in the prior period.
Operating income of $3.20 per diluted common share comfortably beat the $2.64 mean analyst estimate, and was a turnaround from the $5.89 operating loss per share in the fourth quarter of 2018.
Everest’s share price was up more than 2 percent in morning trading, with the Bermudian (re)insurer enjoying its highest ever share price. At 12.15pm ET, the shares were trading at $293.94, a record and up almost 3 percent on yesterday’s closing price.
Juan Andrade in his first earnings call as president and CEO of Everest described 2019 as “a solid year for our company, as we continue to benefit from improving market conditions across all areas of our business”. He added: “This result reflects the steps we have taken to diversify our portfolio and reduce volatility.”
Jonathan Zaffino, CEO of Everest’s insurance division noted that rates were up 12 percent in the fourth quarter excluding workers compensation, an increase from the 7.5 percent in the third quarter.
“We feel really good about the rate environment. We like where we’re heading, and we do believe we are exceeding trend in almost every area,” Zaffino said.
Everest’s combined ratio was 101.5 percent for the quarter. This included the previously announced $215mn of catastrophe losses. In addition, the quarter included higher than expected losses of $50mn in the crop reinsurance book as result of inclement weather.
The $50mn crop loss aded about 3.5 points to the reinsurance combined ratio for the quarter and about 1 point overall for the year.
Everest in the fourth quarter booked $19mn of favourable prior year reserve development, pushing the full year total to $94mn. The insurance segment reported $16mn of favourable prior year reserve development during the quarter largely related to its workers compensation business.
The reinsurance segment reported $3mn of favourable prior year development during the quarter and $77mn for the year. The favourable development was in some short-tail and credit-related lines such as property, surety, marine and mortgage offset by actions to strengthen reserves in the Bermuda segment for losses on some specific accounts for both property and casualty.