Everest Re CEO explains cat loss miscalculation
Bermuda-based Everest Re CEO Dominic (Dom) Addesso has explained how the reinsurer miscalculated the cat losses from 2018 which made the company issue a profit warning for its second quarter 2018 results.
In mid-July, Everest Re Group warned that it expected to report a charge for net reserve adjustments of approximately $250 million, after tax, for the second quarter of 2018.
Everest Re ended up reporting a sharp drop in earnings for the second quarter of 2018 compared to the previous year primarily driven by the 2017 hurricane events – Harvey, Irma and Maria.
Catastrophe losses, net of reinsurance and reinstatement premiums, amounted to $464.8 million in the quarter, with $399.8 million primarily related to the 2017 storm events and $65.0 million of current year catastrophe losses from cyclone Mekunu in Oman and Yemen and late winter storms in the US.
Overall, the group reported net income of $69.9 million for the second quarter of 2018 compared to net income of $245.7 million in the same period a year ago.
“The underlying cause of the reserve shortfall can be attributed to two factors, which were not apparent to us at year end,” Addesso said during the reinsurer’s second quarter earnings call. First, Everest Re’s clients are seeing a large number of reopened claims largely stemming from the AOB (assignment of benefit) threat in Florida, he explained. Ceding companies were trying to settle claims quickly conceivably to mitigate the AOB issue. “The loss reports we received from clients showed a high percentage of closed claims very clearly and we were encouraged by these reports,” Adesso noted. While settling claims quickly initially seemed a sound strategy, this approach left clients vulnerable when the actual repair bills came in higher than on what they originally closed their claim, Adesso said.
“To a lesser extent, but for the same reasons, the claims reopening, has impacted Puerto Rico after Maria as well driving up losses, which crystallized in the second quarter. The reality was that these closed claim statistics we were seeing were a false positive,” Adesso noted.
The second factor was an extraordinary rise relative to past events in loss adjustment expenses, Adesso said. “The expense numbers we are seeing are significantly above our historical data. In fact we saw some treaties experience high 30s and even 40% expense loads,” he said.
“These numbers only began to emerge in the second quarter claim reports,” he added.
Reopened claims and a much higher than expected loss adjustment expense (LAE) were the main reasons for the increases in prior year net reserve adjustment, Adesso said.
“Going forward, cat pricing will need to reflect a higher level of loss adjustment expenses, particularly for those accounts that rely heavily on third-party adjustment services,” Adesso noted.
“While we did temporarily get the scorekeeping wrong make no mistake that we are playing the game at a high level and we will continue to do so. Our profits from our cat portfolio were $3.5 billion over the last 5 years. This business comes with volatility, but the appropriate reward for the risk is evident,” Adesso summed it up.
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