Everest Re see opportunity in alternative reinsurance capital management

by Artemis on February 19, 2013

Another reinsurer commented on the influx of alternative capacity from capital markets and investor backed sources into the reinsurance market in its recent earnings conference call. Bermuda based Everest Re Group Ltd. recently took its first step into the alternative capacity arena with the launch of its Mt. Logan Re, Ltd. sidecar. Judging by the comments made by its CEO, Everest Re intends to leverage third-party capital as a key part of its business.

To get Mt. Logan Re off the ground, Everest Re provided $50m of capital and attracted another $200m of capital from third-party investors to reach an initial target capitalisation of $250m. Mt. Logan Re will underwrite worldwide property catastrophe reinsurance business on a fully collateralized basis and Everest Re even brought in a seasoned professional, in Rick Pagnani, to run that part of the business.

So clearly Everest Re were sending a signal, in the launch of Mt. Logan Re, that they intend to capture some of the profits to be made in the growing move to leverage third-party capital for underwriting, premiums and fees.

In the recent earnings conference call, President and CFO of Everest Re Dom Addesso said that the development of the firms capital markets platform would support premium growth and give the firm an ability to bring more capacity to the market. He said he is optimistic that Mt. Logan Re would contribute to the firms ability to expand and offer shareholders decent returns.

Everest Re CEO Joe Taranto also commented on the issue of alternative capital. He said that Everest Re sees more capital coming into the reinsurance marketplace, some from sidecars some from pension funds and other investor sources. Showing that he intends this to become a meaningful part of the Everest Re business, Taranto said; “We intend to participate in that market and frankly we intend to make some fees on that market.” He continued to say that the fee part of Everest’s book will be quite small to begin with, but they see opportunities to grow that.

Taranto said that Everest Re has a, “Tremendous opportunity to write a lot more business share it with some partners and make fees in the process.” He said that yes that will bring additional capacity to the reinsurance market, and yes it may make more competition, but when the capital is looking for profitable business that it is a good business model.

Despite the competitive nature of this new capital coming into the reinsurance space, Taranto doesn’t see it as giving up profitability in order to get established in the alternative reinsurance capacity market. He said; “No, we’re not looking to take away from anything that we would want to keep for ourselves. That really is the design. Now we’ll try to put ourselves in the same position with our new partners, so they feel as if it’s really a equal trading. But we are not looking to give away $1 worth of business that we would normally write for ourselves.”

Taranto’s comments show that he believes that Everest Re can continue to underwrite its traditional reinsurance business and at the same time acquire incremental business through its alternative capacity and capital markets operations. He said that given the opportunities available to Everest Re; “We’ll be able to fill our plate with everything that we want. And then have more that we can share with others on a fee basis.”

Perhaps hinting at where Everest Re maybe going with its third-party capital management and alternative capacity aspirations, Taranto said when asked about the Florida market that there are likely to be good opportunities in Florida wind business at the June renewals for Everest Re. The analyst then asked Taranto whether that would be a place Everest would look to use a sidecar, to which Taranto said no and that he saw Florida as requiring more permanent capital.

“It’s not a sidecar that we’re putting together and that’s in the sense that sidecars tend to be operations that are put together for one and two years and then they’re kind of designed to go away”, answered Taranto. “We’re putting something together that would be in place permanently.”

Could that hint at a strategy that could see Everest Re launch a more permanent solution to deploy alternative capital for the upcoming Florida renewals? A managed collateralized reinsurance-linked fund would seem to offer a very suitable solution for that problem, perhaps Everest Re will be the next reinsurer to launch one.

Of course that is just a guess but it would seem that if Everest Re has a desire to increase its use of third-party capital for underwriting, with a particular focus on Florida at the renewals, and feels a sidecar is too ‘temporary’ a managed fund solution may just meet its needs and give it scope to diversify away from Florida wind too. Whatever Everest Re decide to do it seems clear that it has a desire to be active in the alternative reinsurance capital arena, as do so many other reinsurers right now.

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