Expected double-digit retro firming an opportunity for Everest Re: Doucette

Everest Re is anticipating double-digit rate increases across the retrocessional reinsurance market at the January renewals, which the company believes it is well-positioned to take advantage of, although it aims to be selective.

This could also benefit the third-party investors backing Everest Re’s collateralized reinsurance sidecar like vehicle Mt. Logan Re, as any rate increases can drive new opportunities that the third-party investors can participate in as well.

In addition, any increase in retro appetite on the Everest Re front underwriting-end, could also drive greater need for peak retrocession of its own on the back-end of the Everest Re business, perhaps leading to increasing use of catastrophe bonds and other structures including industry loss warranties (ILW’s) further down the line and providing more opportunity for insurance-linked securities (ILS) investors.

Discussing the third-quarter results of Everest Re, John Doucette, President & CEO of the firms reinsurance operations, explained that retro has to rise while reinsurance will follow in some cases.

“Although the insurance industry would have hoped for a quieter 2019 to regroup this has not been the case,” Doucette explained. “The losses have shaken up the primary reinsurance and retro markets, creating dislocation and in turn opportunity.

“Though not an across-the-board traditional hard market, we see a foundationally more sustainable environment for the near-and medium-term in many lines.”

Doucette went on to explain that there are numerous causes for the reinsurance and retrocession markets to harden right now, more than just catastrophe losses.

He cited trapped capital and the resulting negative sentiment this has created for the ILS market, emerging industry loss trends in the casualty lines of business, the fact primary market conditions are improving, while major players are also taking underwriting actions and finally the persistent low investment yield environment.

All of these issues point to an increasing need for rate, but in retrocession that need is perhaps seen as particularly urgent right now as the industry faces another year of loss activity.

“We are increasingly optimistic on the treaty & facultative global reinsurance market heading into the renewal and our improving opportunity to deploy capital profitably in 2020 and beyond,” Doucette said.

Rising demand for reinsurance protection alongside improving rates and terms, means that for Everest Re more opportunities are likely to hit its underwriting requirements and pricing targets, Doucette further explained.

Trapped collateral is a significant issue, particularly in the retro market. Doucette highlighted that, “The supply of reinsurance capital is relatively flat or down, considering trapped capital,” with more than half of retro capacity supported by the capital markets and ILS investors currently.

“There will be more collateral trapped by the recent events,” he warned, going on to highlight that only a few rated reinsurance firms have the capital to really take advantage of the opportunities that are emerging, believing Everest Re to be one of them.

Everest Re is looking for more sustained pricing rises as well, not just a bounce at the next immediate set of renewals.

“Our pricing targets for cat-exposed property reinsurance and retro continue to rise,” Doucette said. “The current property momentum is generally favourable and will likely last well into 2020, but additional improvement in rates, terms and conditions are required in global property reinsurance and retro markets, given the elevated risk factors and increased exposures in certain territories, as well as the recent substantial industry losses.

“More rate is required to get back to adequate levels, to achieve a long-term, appropriate and sustainable return on capital.”

Summing up, he explained, “We expect January 1st property rates to be generally up in most regions and more recently loss-affected territories will see even greater impacts.

“In retro, we anticipate double-digit rate increases, with Hagibis causing further losses and trapped capital late in the year and uncertainty on ultimate loss, rates may even improve more.

“Improvement in retro is necessary, given those rates have been under the most pressure by non-traditional capital. But also because retro bore a disproportionate share of losses since 2017.

“Everest has the capital and capability to effectively write in this market. We believe there will be select opportunities to deploy additional capital depending on market conditions.”

So the outlook for retrocession renewals continues to look increasingly positive, hence it’s no surprise that numerous capital raising attempts to target retro provision are underway at this time.

The traditional reinsurers like Everest Re are likely to make use of their third-party capital vehicles in supporting increasing the size of their retro books, as this is a more efficient way than using other sources of hedging capacity.

However, for a company like Everest Re with its significant use of alternative capital through catastrophe bonds as well, any increased appetite to underwrite retro could result in increasing cessions of risk to the investors in the capital markets as well.