A Tale of Two Floridas: Hurricane Irma’s Belated Impact on Reinsurers

Everest Re was among those negatively impacted, with a preannounced net reserve charge of $250 million after taxes pushing net income down to $69.9 million, a figure more than 70 percent lower than last year’s second-quarter income of $245.7 million.

During an earnings conference call, Dom Addesso, Everest Re’s president and chief executive officer, explained factors, which had not been apparent at year-end but came to light in the quarter necessitating the charge—a large number of reopened claims and demand surge “beyond anything seen before.”

Addesso said that loss reports received from clients late last year, which indicated a high percentage of closed claims “very clearly,” were misleading. “The reality was that these closed claim statistics we were seeing were a false positive,” he said.

The cedents were trying to settle claims quickly, “conceivably to mitigate the AOB [assignment of benefits] issue” in Florida.

“Settling claims quickly was initially a sound strategy, but what we now know is that this approach left our clients vulnerable when the actual repair bills came in higher,” he said.

As for the unprecedent jump in the loss adjustment expense component related to high adjuster demand, Addesso said some treaties experienced high 30s and even 40 percent expense loads—well above historical norms. “While some of the LAE level was driven by scarcity of resources due to multiple, almost simultaneous events—for example, Citizens doubled their standard adjuster fees due to the shortage created by Hurricane Harvey—our pricing needs to better consider this new reality,” Everest’s CEO said, adding that reinsurer’s reserving process needs to be refined to consider these multiple-event factors as well.

But property-catastrophe reinsurance is still attractive—and still an income generator for the company. “While we did temporarily get the scorekeeping wrong, make no mistake that we are playing the game at a high level and will continue to do so. Our profits from our cat portfolio were $3.5 billion over the last five years. This business comes with volatility, but the appropriate reward for the risk is evident,” Addesso concluded.

In the quarter, Everest reported a 107.4 combined ratio, or an underwriting loss of $97.5 million, on $1.3 billion of net premiums for the reinsurance segment. Comparable figures in second-quarter 2017 were 87.4 for the combined ratio, or an underwriting profit of $126.5 million, on net premiums of 875.4 million.

Everest’s insurance book, contributing $469.5 million in premiums in the quarter, produced a $9.5 million underwriting profit, or a combined ratio of 97.7. Addesso attributed more consistent profitability in Everest’s insurance book to some reunderwriting and new areas of growth.

Two days after Everest announced those results, Aspen Insurance Holdings reported a bottom-line loss for the second quarter but better second-quarter underwriting results in both its insurance and reinsurance segments. While investment losses and foreign exchange losses dented the bottom line, reinsurance underwriting profit grew more than 20 percent, and an analyst asked Aspen CEO Chris O’Kane to give his take on late Irma developments during the company’s conference call.

“The way it has run off is not a surprise,” O’Kane said, suggesting that careful client selection in Florida and positioning of the book helped mitigate the damage to his company’s reinsurance results.

“The client is an insurance company. An insurance company has capital, it has an IT system, it has operations—a CEO and CFO. It has claims adjusters. It does all the things that needs to be done to run a business wisely. And that’s why when we look for a client in Florida, we’re quite likely to choose a national writer—maybe even a commercial industrial writer with Florida exposures because we think they do the job well,” he said.

“When you turn to the undercapitalized companies, maybe they don’t have any claims adjusters, or it’s a skeleton crew. And when something happens, they’re out there looking for adjusters and paying more money” for adjusters who aren’t the highest quality. “They’re not looking after their policyholders very well. [And] a unit of exposure with one of these guys is going to give you more loss than a unit of exposure to a big properly run insurance company,” he said.

“I don’t want to say we have no exposure to the lightly capitalized guys in Dade and Broward, but we just don’t really see that as a core part of our book, which means we’re not exposed so much to Dade and Broward—and means we’re not exposed to the LAE problem and assignment of rights problem that others maybe have,” he said. “That’s why I think our reserves turned out to be modestly redundant.”