Everest’s deal to sell $2bn of renewal rights takes it a step towards the “lonely road” of the pure-play reinsurer – although it does not close down its primary exposure completely.
The transaction, announced earlier this week, will involve the sale to AIG of $2bn of renewal rights for most of Everest’s global retail business across the US, UK, Europe and Asia Pacific regions.
The deal exemplifies the split in philosophies in the broader P&C market.
The orthodox view is that primary business allows reinsurers to diversify, reshaping their exposure to risks through primary or reinsurance as conditions demand it.
The contrarian view – or what this publication has dubbed the “lonely road” – is that primary business can be a distraction or a source of insidious risk aggregation.
Another concern around mixing the two is that such a strategy demands a skill set reinsurers do not usually have, given that insurance is a question of distribution and logistics, while reinsurance is a form of high finance.
Diverging from ‘Chubbification’
The deal marks a clear departure from Everest’s strategy, under former CEO Juan Andrade, to balance its portfolio with more US and international primary business – a process sister title Insurance Insider US called the “Chubbification” of Everest.
In a 2021 investor day, Andrade said the carrier would target annual growth of 18%-22% in primary business, compared to 8%-12% in reinsurance.
That manifested in London with the appointment of ex-Chubb duo Jason Keen and Adam Clifford as co-heads of insurance.
The renewal rights sale does not completely reverse Everest’s push into primary business.
Instead, the deal will remove a large proportion of Everest’s retail insurance business, allowing it to refocus its efforts on US E&S and London insurance. Keen has since been promoted as a result of the AIG deal to global wholesale and specialty CEO at Everest.
That frees it from the difficulty of a slow, arduous and expensive retail build while retaining exposure to more complex wholesale business, which is more akin to reinsurance.
As Everest CFO Mark Kociancic said on a conference call earlier this week, the company’s wholesale and specialty insurance operations “allow us to very nimbly manage the market cycle” with “less investment in terms of people and technology”, reducing execution risk.
As a result, Kociancic said, the performance differential between the just-sold retail business and the retained specialty/wholesale insurance business is around 10 points on their respective combined ratios.
Disclosures around the deal from Everest show that this move will increase its primary portfolio’s exposure to property/short-tail, specialty casualty and other specialty business while reducing exposure to workers’ comp and professional liability.
In broad terms, however, the deal reduces Everest’s participation in primary business meaningfully, cutting it from almost one-third to less than 20% of its overall portfolio.
That aligns Everest’s strategy more with the contrarian view that a pure reinsurance focus is more desirable than the orthodox view that reinsurance businesses should diversify meaningfully with primary.
By way of comparison, Bermudian peer Arch devotes 42% of its overall portfolio to insurance.
RenaissanceRe, on the other hand, is almost entirely a pure-play reinsurer – in fact, it stands out among traditional listed Bermudian peers in that it is the only one that has not attempted to build an insurance franchise or sold out.
Its 2023 takeover of Validus, which catapulted it to fifth place among global reinsurers ranked by P&C premium, demonstrates a doubling down in reinsurance.
RenRe restrains its primary exposure to a small segment of its property business that includes E&S and binders alongside proportional and per-risk property reinsurance and regional US multi-line reinsurance.
The exact split of primary and reinsurance within this segment, dubbed “other property”, is unknown. Overall, the segment accounted for $1.8bn of gross premium in 2024, versus the $2.9bn in premium it wrote in cat reinsurance, and 15% of group top line.
The “reinsurer-plus” model
Over the past five years, reinsurers have used different tactics in a bid to diversify away from core cat risk and other classes of reinsurance and provide more flexibility to trade through market cycles.
For some, this has involved greater focus on insurance, particularly specialty business, as a diversifier. Scor, for instance, has in recent years grown in specialty insurance for exactly that reason.
Swiss Re, meanwhile, has undertaken a rationalisation of which lines it writes on a direct or reinsurance basis, dropping some primary specialty classes where it cannot reach sufficient scale such as aviation, but maintaining a primary and reinsurance presence in some cases.
Through its AIG deal, Everest has opted for a “reinsurer-plus” model, where it maintains some exposure through wholesale and specialty primary. Its pivot just a few years into its embrace of primary insurance, however, takes it one step further along the “lonely road”.
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