To My Fellow PURE Members,
Bear with me if you’ve heard this story before: Major hurricanes bring destruction to the East and Gulf Coasts of the United States. Unprecedented wildfires cause heartbreaking loss of lives and homes in both Northern and Southern California. The PURE claims team does an admirable job in response to these events. The PURE underwriting team proves its worth by carefully selecting for membership only the most responsible owners of the finest built homes. The PURE membership—always the hero of our story—emerges from these devastating events with greater wisdom and resiliency, having been rewarded for all of the decisions they made to clear brush, install hurricane shutters and never cut corners. 2018 looked an awful lot like 2017. And I don’t think any of us want to go for the “three-peat.”
We began the year with a devastating anomaly as an early January 2018 rainfall brought us one of our largest losses of 2017. The January rain turned the hillside above Santa Barbara, California, into a fast-flowing river of mud. The damage caused by the volume and velocity of mud and debris was hard to believe. There can be some questions of insurance coverage from damage caused by rain and mud, but PURE (like all insurers) determined the proximate cause of loss to be the December 2017 Thomas Fire which left the hillside defenseless. For a very short time, the Thomas Fire held the distinction as the largest wildfire in California’s history. For many of our members, they had just returned to their homes after the fatigue and anxiety of an extended forced evacuation. There have been many lessons learned from the recent California fires, but none more important than the reminder that the PURE membership is a strong and resilient bunch.
The winter weather on the East Coast presented a constant, albeit less dramatic, risk to the PURE membership. The extreme cold temperatures were followed by the fierce winds of back-to-back-to-back nor’easters named Quinn, Riley and Skylar. We remain convinced that we can continuously improve our odds against winter weather. Data and analytics make it easier to predict the likelihood of damage and smart home technology makes it easier to prevent pipes from bursting—or at least reduce the damage by immediately shutting off the flow of water. We are grateful for all of our members who have taken extra precautions to save themselves from the massive disruption of a burst pipe, and we are eager to engage with the entire membership to join us in the effort to reduce winter weather losses.
Hurricane Florence brought strong winds to the Carolina coast and soaking rain that seemed to never end. Some of the worst damage occurred away from the shoreline as big trees fell on beautiful homes, and members as far inland as Raleigh and Charlotte were faced with a massive cleanup. Florence was a reminder of the importance of flood insurance. PURE provides a “write your own” version of the National Flood Insurance Program, backed by our claims response. If you have not purchased flood insurance in the past, please see your broker for a quote. If you already have an NFIP policy, and PURE is not the servicing company, your broker may be able to help you make the switch and improve your service experience.
Hurricane Michael taught us the lesson of “rapid intensification.” A tropical disturbance in the Gulf of Mexico became a tropical depression and a few days later made landfall as one of the most intense hurricanes to ever hit the United States. Dozens of people died and it is estimated that more than $10 billion of damage was caused. The New York Times famously profiled the last house standing in the beach community along the Northwest coast of Florida’s “Big Bend.” This was a great reminder of the care and discipline that thousands of PURE members have shown in buying or building homes that are elevated and constructed to meet or exceed the strict building codes along the Florida coast. Hurricane Michael was also vivid proof of the soundness of our strategy to serve those who own newer, bigger and better-built homes.
The Camp Fire devastated the town of Paradise, California, and became the deadliest and most destructive wildfire in California history. We do not serve many members in that region, but we all feel for the loss suffered by that community. Earlier in the year, one of our members sadly lost their beautiful home in a wildfire near Redding, California. We were on high alert and engaged with our membership in Los Angeles and Ventura Counties as the Woolsey Fire threatened homes from Thousand Oaks down to Malibu. The professional firefighting crews who battled that fire deserve our unending appreciation as they saved countless homes in the region. The PURE Wildfire Mitigation team worked overtime to reduce the likelihood of loss. They were aided by the careful preparation of the PURE membership, who maintained critical defensible space around their homes and starve the fire of any additional fuel. Our membership was fortunate to not suffer a single total loss in this fire, but that is not to say there was no significant damage. As I write to you, our members are still repairing burned garages and pool houses and restoring smoke-damaged walls and furniture. They are also facing the emotional challenge of stepping outside and seeing the remains of some parts of their neighborhood where others were not as fortunate.
PURE entered California less than five years ago. Today it represents our fourth largest state and our fastest-growing major market. The insurance market in California is undergoing major changes as insurers come to grips with the reality that 2017 brought more wildfire losses to the state than the prior 20 years combined, and that 2018 will likely be even more costly. We have taken pride in our disciplined underwriting strategy to carefully select members whose homes are more likely to survive a wildfire because they are not directly adjacent to the wildlands and they live in neighborhoods with multiple access routes and maintain defensible space around their homes. Looking back at communities like Paradise or Santa Rosa, it is clear that making good bets is only part of the equation. Insurance companies can make too many bets—each of which may have looked good; yet if you lose, you might lose big. Every day, we are enhancing our understanding and management of aggregate exposures for wildfire with proprietary technology and analytics. We have been prudent in our early years in California and you can expect more of the same from us in the coming years.
By the end of the year, we had paid out or set aside about the same amount for claims and expenses as premiums taken in. All things considered, this is a pretty good result. When you factor in the impact of member surplus contributions, your insurance company had another strong year of enhancing its financial strength. Policyholder surplus (the financial backstop available to pay claims when premiums and reinsurance are not enough) grew by more than 20% in 2018 and the PURE Group of Insurance Companies surplus exceeded $500 million by the end of the year. Our principal rating agency, A.M. Best, upgraded its Financial Strength Rating of the PURE Group of Insurance Companies to “A” (Excellent) with a Stable outlook. Rating agencies are reluctant to upgrade growing companies since they naturally believe growth brings uncertainty and puts a strain on operations. I am so proud of my colleagues who have managed the growth of this company carefully, and I am grateful to the PURE membership for fueling that growth with referrals to your most responsible friends.
Our financial strength and claims-paying ability was strengthened by a group of reinsurance companies that demonstrated great faith in our business plan this year. Thirteen reinsurers agreed to a partnership where they share in the results of every policy we write on a proportional basis. Every premium is shared, as well as every loss. This “All Lines Quota Share” creates an efficient and scalable source of capital—provided we deliver good results. Our ability to serve our members with confidence requires that this partnership afford our counterparties a chance to earn a fair return. 2018 was another challenging year for the reinsurance industry. We are constantly trying to align the interests of all stakeholders, and reinsurers are an important part of that equation.
Critical to our formula is our ability to delight individual members, while not losing sight of the needs of the entire membership. One example where this conflict arises is when we need to non-renew a loyal member. There remains a small, single-digit percentage of the PURE membership for whom the likelihood of an underwriting profit is remote. For some, the predictors of future losses may have always been present, and we are getting smarter every day to prevent them from joining the membership in the first place. For others, things may have changed since they joined. Not offering a renewal to a PURE member may be the least enjoyable thing that our staff does, but it might be one of the more important actions for the membership at large. It keeps premiums fair, offers profits to reinsurers, helps strengthen PURE’s financial condition and serves the best interests of our membership, even if it upsets an existing member. I am encouraging our folks to demonstrate empathy to the entire membership when faced with these challenges.
Direct Premiums Written in PURE grew by more than 23% in 2018 with premiums approaching our first billion dollars in the reciprocal. Growth was strong across the country, with every one of our 10 regions showing growth of 18% or greater. We had strong growth in new members for 2018 and our retention of the membership was even stronger, with nearly 96% of members renewing with PURE and collectively buying coverage for more homes, cars, art and jewelry than ever before.
Our network of independent brokers is also stronger than ever. We pride ourselves on working with an elite group of independent professionals whose expertise and commitment to service enhances our member experience ecosystem. These relationships are deepening, with three quarters of our business having been introduced by fewer than 300 independent firms countrywide. We have begun to allow access to PURE for smaller independent brokerages that demonstrate the integrity and professionalism we demand, but that may not have access to the volumes of business that our existing partners have. This business, called PURE Connect, has allowed us to create even better geographical diversification without sacrificing any underwriting standards. We see the day coming when PURE Connect introduces us to members who contribute, in total, more than $100 million in annual premiums to PURE.
Another new business, PURE Programs, continues to shine. You may recall that PURE Programs is a Managing General Underwriter (MGU), owned by the parent company of your Attorney-in-Fact, who brings a high-touch service platform to high-value and hard-to-place risks. Nearly half of the clients served by PURE Programs to date have been PURE members who own a home that does not meet our underwriting standards. PURE does not assume the risk for these higher risk properties, as we have a panel of insurers who authorize PURE Programs to underwrite on their behalf. If we can provide solutions without sacrificing our underwriting standards, everybody wins. Another way PURE members benefit from PURE Programs is the investment we have made to significantly increase our resources in claims adjusters and risk management professionals. We believe PURE Programs can play a significant role in the California economy by manufacturing insurance capacity for those who live in areas where the exposure to brushfire or the aggregation of risks is too great for PURE or other “admitted” insurers. If the insurance market tightens too much and home values suffer, the consequences can be significant. We are trying to find an alignment of interests where insurers and other capital providers are paid enough that they are willing to assume this difficult and volatile risk, while consumers find those premiums to be acceptable (knowing they don’t have many options) and they find the service experience to be exceptional.
Solving these great challenges requires a team of bright, hard-working and creative people. Our 10 offices across the country are filled with such people who are guided by our sense of purpose and energized by the chance to serve you. From our early days, we have believed that our culture can be powered by empathy and emotional intelligence. We screen for such qualities when we interview and we train our folks so that we can all strengthen our own EQ. Over time, we have seen a risk from the oversimplification of our emphasis on empathy, and we have needed to ensure our greatest contributors are “beyond nice.” Combining strong emotional intelligence with curiosity and a growth mindset ensures we have a lovely group of people who are rarely satisfied and relentless in the pursuit of better solutions. This year, we began a process of “renewing our vows.” We wanted to re-evaluate our purpose and our principles to ensure they never become stale or just jargon. We spend more time on matters of culture than virtually any other part of our company. I know the many business leaders within the PURE membership feel similarly and I welcome all of the wisdom you may have for me on this subject.
The future will bring us plenty of challenges—from economic volatility to climate change to the increased threats of data privacy and security. We will do our best to tackle all of them with the same sense of urgency and purpose that has guided us for the past 13 years. Above all, we will continue to reinforce our commitment to an alignment of interests. Our employees, our independent broker partners, reinsurers, investors and, of course, our membership can all be rewarded when we deliver an extraordinary service experience, backed by sound underwriting results. 2018 was a very good year in a pretty tough environment. 2019 will bring more change and more challenges—but your insurance company is up to the task.
Thank you again for the opportunity to be of service to you and your families.
President and Chief Executive Officer