Alternative capital helps Everest Re “dust off” Purple, grow retro 25%

Everest Re took advantage of market conditions around the January renewals to build a significantly larger book of retrocession business, leveraging its access to alternative reinsurance capital and use of catastrophe bonds to allow it to deploy capital into its Purple pillared retro product.

Everest Re has repeatedly demonstrated an ability to manage the reinsurance market cycle, using capital from multiple sources to help it in managing volatility within its book, as well as to provide or free up additional capacity for underwriting areas of risk less suited to its own balance-sheet capital.

At the January renewals, Everest Re showed a significantly increased appetite for writing retrocession, including the use of its pillared retro product Purple, as it sought to take advantage of improved rates and pricing.

But it couldn’t have done this as meaningfully without its sources of alternative capital, as these helped Everest Re to manage the volatility an enlarged retro book brings with it.

Speaking during the reinsurers earnings call this week CEO of Everest Re Juan Andrade explained, “The way we accessed alternative capital at the end of the year and into 1/1 really allowed us to build the capacity and to deploy it into the improved 1/1 market, as we discussed earlier, particularly to our retro and Purple products, while helping us to manage our volatility and our P&L. So for us, that was very strategic.”

Everest Re’s growth in retrocession was not a surprise.

We first mentioned this back in December, when we explained that our market sources had told us that Everest Re was quoting and writing some lower down layers of retrocession programs at the renewals and was also writing some of its own pillared retro product Purple.

After the disappearance of the most widely-used pillared retro product from the market, Markel CATCo’s collateralised product, Everest Re found greater demand for its own Purple product as a result and took full advantage of this it seems.

John Doucette, President and CEO of Everest Re’s Reinsurance division provided more colour on the renewal and the company’s growing retrocession book.

“At January 1, Everest deployed more capacity in retro and our Purple product,” Doucette explained.

“After this January 2020 renewal we have a stronger, even healthier, book across our overall global property portfolio, including property cat, proportional, facultative, per-risk, retro and Purple treaties, with better balance, diversification and limit deployment. And we have improved expected margins, while managing the size of our catastrophe PML,” he also said.

The use of alternative capital within Everest Re’s own managed capital facility Mt. Logan Re, as well as its Kilimanjaro Re catastrophe bonds of which it renewed $850 million worth in time for the renewal, as well as other hedges, all helped Everest Re to put more capacity to work in the retro and pillared retro markets (even though its overall third-party capital AuM dropped).

Doucette said, “Approaching January 1st we utilised alternative capital to capture value in the improving market. We went back to the cat bond market to renew the expiring Kilimanjaro bonds and utilised the approximately $800 million of AuM in Mt. Logan.

“Along with in-force cat bonds and other hedges, we holistically built capacity to deploy on deals we liked, particularly in retro and Purple.

“At 1/1 we were able to improve the profitability of our global cat book, optimising the risk & reward of the portfolio, while managing the volatility.”

Driving the appetite for underwriting more retrocession was, of course, the improved rate environment.

Doucette called the reinsurance market in 2020 “dynamic” after the three years of catastrophes and loss development.

“At January 1st retro rates were up meaningfully and we wrote more premiums accordingly,” he explained. “We dusted off our pillared product Purple and marketed that beyond the few core clients who have been consistent buyers.”

The growth achieved is significant and at the much higher rates seen this could be a strong earning contributor for Everest Re over the coming year.

“The end result was roughly a 25% increase in our combined retro and Purple premium,” Doucette said.

As we understand it, the Purple product is a more standard pillared retro product, without some of the features that ended up becoming an issue in terms of loss aggregation to that segment of the market in recent years.

It’s likely Everest Re will continue to write this business as the opportunities allow, over the coming months. As with retro pricing significantly higher, the opportunity to absorb more of this demand could result in strong income for the company.

At the same time, increased underwriting of retro and in particular the Purple product may cause Everest Re to further increase its use of alternative reinsurance capital as well.

So additional issuances of Kilimanjaro Re catastrophe bonds could be on the cards, as Everest Re looks to manage its property catastrophe book over the coming quarters.

Doucette seemed confident that opportunities will persist, saying, “As we look forward in 2020 we see January 1 momentum continuing throughout the year, on reinsurance and retro, including upward pricing pressure both in Japan at April 1 and also in Florida at June 1. Trapped capital and investor fatigue continue to be important drivers in the property space.”

The way Everest Re has approached this renewal, in utilising third-party capital sources through Mt. Logan Re, cat bonds and other hedges to enable it to write more higher return business in the retro market and through its Purple product is notable.

It’s the right way for this kind of company to be looking at its cat bond and ILS related capital sources. As capacity that is not just a pure hedge, but also a lever for its business model, driving efficiencies through its business and enabling Everest Re to do more.

We often say alternative capital and ILS structures can add elasticity to your traditional balance-sheet.

This is exactly what Everest Re is achieving here, which given the 25% growth in the retro book, at clearly higher pricing, can only be a positive for the firms shareholders as we go through the rest of this year.

Also read: Mt. Logan Re AuM & cat bond assets shrank at 1/1 2020 for Everest Re.