Speaking during the Everest fourth-quarter earnings call yesterday, CFO Mark Kociancic explained that the reduced size of the firm’s catastrophe bond program has enabled it to retain more of the economics from its natural catastrophe underwriting.
Like other major global insurance and reinsurance companies, Everest recognises that market conditions for property catastrophe underwriting remain attractive, even after the slight softening at the January 2025 renewals.Which means the economics of underwriting natural catastrophe risks are also attractive and, as a result, firms like Everest want to retain more of the economics where they can.
Everest has significantly reduced the size of its catastrophe bond program, in terms of risk capital outstanding, over the last five and a bit years.
This has occurred during years of significant growth for the company and has resulted in Everest being able to retain much more of the profitability of its property catastrophe reinsurance business, an area it has seemingly accelerated its growth over the last two years.
Back in 2019, Everest had a significant $2.9 billion of retrocessional reinsurance from its outstanding Kilimanjaro Re catastrophe bond capacity, which put it at the top of our catastrophe bond sponsor leaderboard.
By Q3 2020 that had reduced to $2.625 billion, then to $2.325 billion by Q4 2021, $2.06 billion by mid 2022 through mid 2023, then shrunk more aggressively with maturities and non-renewals of cat bonds, to fall to $1.375 billion in early 2024, then recover to $1.575 billion after Everest sponsored its last cat bond, the $200 million Kilimanjaro II Re Ltd. (Series 2024-1) in June 2024.
Further maturities have now reduced Everest’s cat bond protection outstanding to just $1.15 billion at this time.
So, the Kilimanjaro Re catastrophe bond program has shrunk by 60% in just over five years.
Over this period Everest has been growing strongly, while also diversifying further into insurance, instead of reinsurance underwriting, although the reinsurance book has also grown.
The more balanced approach to the Everest portfolio has allowed the company to reduce the cat bond protection, without overly increasing its PMLs. It’s worth noting, of course, that the Mt. Logan Capital Management third-party capital strategies are also helping Everest manage its PML, while sharing in the economics of the business with investors, and these have grown in importance to the company over the same period.
Speaking yesterday, CFO Kociancic provided some insight into what this means for Everest.
Asked about how Everest’s catastrophe load has changed and what an increased focus on natural catastrophe risks, at recent renewals, might mean, Kociancic provided some colour.
He explained, “The cat load is still broadly-consistent in the multi-year approach we’ve taken since 2020.
“What we have done, and we started a couple of years ago, is really trying to take more of the gross exposure net. So we had a fairly large reliance, or impact, from our cat bond issuance over the last several years and prior to 2020.
“We’ve reduced our reliance on those and we’re taking more of the gross on a net basis now.
“So you’re seeing that appetite expand naturally, because we believe the expected returns are still very attractive.
“I don’t think the growth is growing very much, it’s really more of a net that is expanding, primarily because of the cat bonds.”
Clearly, Everest believes property catastrophe business is still very attractive to it, something which is coming out in other results statements this reporting period.
Jim Williamson, President and CEO of Everest, further stated, “I think that’s spot on. The way we do this is really straightforward. We’re trying to build a cat book that is high margin and also very resilient to loss, so that in the event that there is an outsized cat loss somewhere in the world, or a pretty big cat event like a California wildfire, you don’t necessarily expect a wildfire to be $40 billion or $50 billion etc, you can still have a book that can earn a profit.
“In my mind, yes, the fact that there’s less casualty in the denominator can move the percentage of how you think about the cat load. But the fact is, what we’re trying to do is build a cat book that can manage its own losses and still turn a profit.
“We’ve had multiple years now where there’s been really outsized industry losses, and the year of Ian is a good example, where we essentially, in that year, which was a big year for cat losses, we got to a break even piece in our cat book.
“That’s at the core of what we’re doing here, I guess in modelling aspects and the earned premium aspects, but it’s about cat management to get to the outcomes that we want.”
Which suggests major companies like Everest may continue to exhibit strong appetites for property catastrophe risks through upcoming renewals, despite the softening that began in January this year.
We have of course seen this trend before, of maximising retention of economics while growing into a market still deemed attractive. It will be critical to watch for any expansion, or relaxation of, terms at future renewals, as that is where the market will need to demonstrate that discipline remains, or it could become reminiscent of when softening began in earnest in the early to mid-2010’s.
However, in comments on the renewals Everest CEO Williamson drove home the fact the company still intends to remain disciplined at this time, saying, “Although property cat prices were down generally between 5% and 15% for loss free programs, overall rate levels remain above what we need to be willing to deploy capacity in most markets.”
Noting that European markets and secondary peril exposed regions may not be as attractive to Everest, saying, “After a thorough review of our modelling and analytics for these perils, we reached the conclusion that we needed to charge more for European cat exposure, in some cases, significantly more.”
Williamson also explained that Everest believes the Los Angeles wildfires will serve as a reminder “to all property reinsurance underwriters of the need to maintain pricing discipline and achieve adequate rate.”
