2022 Letter from the CEO

My fellow PURE members,

2022 saw your insurance company perform well in the face of an increasingly difficult environment. We built on our already-strong foundation and made progress towards reaching our long-term potential.

Overall, we were not good enough to overcome major hurricanes, extreme winter freezing, inflation and other headwinds. In our 2022 Report to Members, we will attempt to not just explain these challenges but also lay out tangible steps we can all take to mitigate or overcome them in 2023 and beyond.

Nearly 17 years ago, we laid out a plan wherein PURE could help its policyholders do together what would be difficult for them to do on their own—efficiently transfer risk for the mutual benefit of all parties. The sense of community and the alignment of interests are more important today than ever.

During this past year, we saw a meaningful increase in the renewal retention of our membership, with nearly 95% of members electing to stay with PURE. The small amount of “lost business” includes those members we did not offer an option to renew.

If you were to draw from a political analogy, I am not sure we benefited as much from a referendum in favor of PURE, as our competitors dramatically pulled back, and we were most clearly the best choice.

We are committed to improving the service and solutions we offer, so that we can earn your trust and loyalty. Once again, in 2022, we stood out from the pack with direct written premiums up 17% and important recognition earned as the Best High Net Worth Insurance Company at both the Family Wealth Report awards (eight years in a row) and Private Asset Management awards (six years in a row). We are honored to be recognized as the “best,” and we aspire to be known as your “favorite.”

We have deep respect for our reinsurance partners who provide important capital that allows us to confidently and cost-effectively take risk. Our partners assume important risks for PURE and represent a vital part of our capital and risk strategies. We are proud that we have produced consistent profits for our reinsurers. This industry, especially reinsurance for catastrophic damage to property, is going through a sharp transformation.

One leading reinsurer simplified its strategy in three words: “double, double, half.” The company wanted to see primary insurers, like PURE, double the amount of risk they assume before ceding it off. They wanted to double the premium they charge and they intended to cut in half the amount of expense offsets they offer, known as “ceding commissions.” For a group that calls itself the “shock absorber” of the industry, the tightening of the reinsurance markets has certainly offered quite a few shocks.

We believe it is our obligation to fully understand, accurately price and proactively manage risk—and not just to react to the reinsurers. However, there are a number of factors that justify some portions of this extreme market movement. As interest rates have spiked, a reinsurer can now get a higher return on cash in a savings account than they used to charge us for hundreds of millions of dollars of coverage. If their view of the cost of risk were unchanged, they would still likely need to increase rates to reflect the cost of capital.

Unfortunately, the view of risk is only getting worse. The frequency and cost of severe events keeps getting worse and worse, but the nature of the events facing reinsurers has added a tremendous amount of uncertainty (war in Ukraine, COVID, winter freezing). In the face of a higher cost of capital, more severe weather and greater uncertainty, it is reasonable for us to envision that the availability and affordability of reinsurance will be a factor in our plans for a number of years.

Our team has worked hard to battle inflation over the past several quarters. By indexing an increased inflation factor against insured values, we are trying to ensure your coverage limits keep pace with increased claims costs.

We also need to work with individual members whose coverage limits look like outliers with values well below what we see in typical claims costs. We are tackling this from all angles by offering even more in-home inspection services (PURE360®) to better document and value unique features of a home and working with an elite group of restoration contractors to control the cost of repairs.

Despite our efforts, you can see the impact of inflation. In fact, the automobile insurance industry has seen even greater pain from all aspects of the product, from repair costs to legal risks to medical expenses. Once again, we are not immune from these headwinds.

As if the risks and liabilities we faced in 2022 weren’t bad enough, the asset side of our balance sheet faced a nearly unprecedented market. PURE invests more than $1 billion to benefit the membership and to strengthen our claims-paying ability. The bulk of our investment activity is in high-quality, fixed-income with reasonably short durations.

The bad news is that almost all asset classes struggled in 2022, even our conservative portfolio. The good news is that the new monies invested are benefiting from significantly higher yields. We are optimistic that our investments will contribute to an increase in member capital in 2023. Investment losses are yet another contributing factor to the reinsurance tightening.

Since our founding, we have been conscious of curating an optimal diversification of risks. Not surprisingly, Florida, California, Texas and New York are our four biggest states and largely represent our greatest concern for aggregation of risk. For our first 15 years, we believed that the cost of protecting PURE against massive disasters in these areas was a reasonable value. We paid an extra premium for reinsurers to assume that volatility, but it worked for us.

The significant increase in reinsurance costs means that it may no longer be cost effective for PURE to include as many members as we do in some of those areas. Improving our overall profitability gives us more margin for error to assume risks or pay for reinsurance, but as we see the current conditions as closer to permanent, we will be reducing risks in some of these areas.