Juan Andrade, the President and Chief Executive Officer (CEO) of Bermuda-based re/insurer Everest Group, feels that the current reinsurance market is now firmer that it was following the impacts of hurricane Andrew in 1992, as the firm continues to take advantage of strong rate momentum in the property catastrophe space.
Speaking recently during the company’s second-quarter 2023 earnings call, CEO Andrade and other members of the leadership team were extremely upbeat on market conditions.
“The property cat pricing remains strong, and the 2023 hard market has now surpassed the post-Hurricane Andrew market,” said Andrade. “This provided the backdrop for excellent mid-year renewals.”
After striking the Bahamas, Florida, and Louisiana in August 1992 as a powerful Category 5 storm, Hurricane Andrew was the strongest storm to make U.S. landfall in more than 20 years, and caused more than $15 billion in insured losses at the time.
It led to the insolvency of numerous Floridian insurers and some of the largest carriers in the U.S. pulled out of the state altogether. As a result, remaining firms had to rely heavily on reinsurance coverage, which in turn led to a hard market as providers of reinsurance pushed up rates as demand increased.
Fast forwarded 31 years, and elevated losses from storms, including 2022’s extremely costly Hurricane Ian, as well as rising and significant losses from secondary perils, notably severe convective storms, wildfires, and floods, compounded by inflation, and the property reinsurance market is truly hard once again. There’s also been a supply demand imbalance.
Against this backdrop, reinsurers have experienced some favourable conditions during the 2023 renewals, taking advantage of higher rates and securing improved terms and conditions, including raising attachments as they look to avoid frequency losses associated with secondary perils.
“June first renewal, centred on the Florida market, was very strong, with prospective returns exceeding the January 1st renewal,” said Andrade. “This momentum persisted into the July 1st renewal. Pricing was up sharply in key markets around the world. For example, the Australian market underwent a complete restructuring, moving away from frequency covers to true catastrophe structures.”
The CEO stressed that Everest continues to benefit from a flight to quality around the globe, adding that the company was able to deploy additional capacity to many of its core clients at attractive returns.
Earlier in the year, Everest raised $1.5 billion of capital to take advantage of the hard market environment, and during the call, executives were questioned on plans to put this to work.
Andrade explained that the re/insurer is on track to fully deploy the capital by the January 1st, 2024, reinsurance renewals, as it continues to see plenty of opportunity and doesn’t see any change in the current favourable market conditions.
Jim Williamson, Group Chief Operating Officer (COO) and Head of Reinsurance, expanded on this.
“Our expectation is that we’ll be confronted with just excellent prospective returns at the (Jan 1) renewal. Why do we believe that? It’s pretty fundamental stuff.
“The first is that the supply demand imbalance that’s been playing out in the reinsurance market hasn’t fundamentally changed. And we’ve certainly seen analysis that suggests there’s still a very meaningful gap between supply and demand. And I would posit to you that demand is pent up and growing rapidly, and that’s because, I think, many cedents weren’t able to complete their 1/1 placements the way they wanted to. They’re facing a risk environment that is not getting any easier, climate change being at the front of that line, but also inflation, geopolitics, and other factors,” said Williamson.
He went on to note that while reinsurers had a light cat experience in Q2, primary insurers did not – highlighting the near-record level of cat activity witnessed, notably in the U.S.
It’s worth noting that severe convective storm losses dominated global cat losses in the second-quarter and half-year period, and given the higher attachment points and move away from aggregate covers, insurers faced retaining more losses from these types of events.
“So, a really tough spot to be in as a primary underwriter and that’s increasing their demand for reinsurance,” continued Williamson.
Next, Williamson highlighted the fact that there’s simply been no meaningful capital formation to tip the supply demand imbalance, adding that he’s unaware of anything meaningful in the pipeline that’s going to alter dynamics.
“The other factor that I think is important is if you go back to 1/1, many of the panels that got put in place, particularly for the global cedents, included a number of reinsurers that frankly, I think, they’d rather not be trading with very extensively. And as Juan had mentioned in his opening remarks, there is a global flight to quality happening, and we think we’ll continue to benefit from that at 1/1, where we’ll have an opportunity to help our clients clean up those panels with a much higher quality underwriter,” he said.
“And then the last piece that I’ll cite, and I think it’s important, it’s a little harder to quantify or maybe impossible. But there’s an underwriter psychology component in play, which is, there’s a reason this market hardened, and it’s because underwriters have taken a number of years of cat losses, and I haven’t met anybody in this industry who because they may have some additional capital coming into 1/1, wants to trade down or auction down pricing in property cat. That is not the mentality that exists in our industry,” continued Williamson.
As a result of all of these factors, Williamson explained that Everest plans to “push hard for rate increases” at the January 1st, 2024 renewals.
“We think the industry should be pushing hard for more, given the experience we’ve had and all those external factors we talked about.
“We’re going to be looking to grow not just property cat, which we will grow meaningfully, but casualty, specialty, and a number of other areas. We are globally diversified so we can drive growth in multiple regions.
“We’re also diversified by line so we can grow cat, non-cat property, specialty, you name it. And we fully expect that we will complete the deployment of the incremental capital at the 1/1 renewal at outstanding terms,” said Williamson.
