Alternative capacity increasingly part of Everest Re’s strategy: Addesso

by Artemis on April 24, 2014

Bermudian reinsurance group Everest Re is increasingly using alternative reinsurance capital as part of its strategy as the firm seeks ways to optimise its returns, according to President and CEO Dominic Addesso.

After a strong first-quarter, reported yesterday, which saw Everest Re beat expectations reporting after-tax income of $281m, equating to a 17% return on equity and a combined ratio of 80%, Addesso highlighted the firms use of alternative reinsurance capital on both sides of its business.

Addesso commented on the reinsurers first-quarter results; “Everest had another excellent quarter producing $281 million of after-tax operating income and a net income return on equity of 17%, driven by strong underwriting results with a combined ratio of 80.0%. The market is always challenging but we are continuing to find opportunities to grow premium and risk-adjusted returns, demonstrating the strength of our franchise and operating strategies.”

Once again this quarter will see reinsurers results helped by a low-level of global catastrophe losses and the expectation is for positive results at the majority of the Bermudian reinsurance players.

Everest Re has recently taken advantage of the low-cost of alternative reinsurance capacity by entering the catastrophe bond market for the first time with the issuance of the soon to complete $450m Kilimanjaro Re cat bond. With pricing and ILS market conditions at their most conducive, the reinsurer has chosen to secure a large amount of its retrocessional cover through the cat bond market this year.

Addesso explained; “We expect to close shortly on our first catastrophe bonds that will provide $450 million of property catastrophe risk coverage at very optimal pricing and terms and conditions.”

Everest Re does not just use alternative or third-party reinsurance capital for its own risk transfer, it also operates the Mt. Logan Re sidecar, a fully-collateralized vehicle which provides catastrophe reinsurance cover backed predominantly by third-party investors capital.

In the first-quarter, Everest Re’s worldwide, reinsurance premiums, including those underwritten at the Mt. Logan Re sidecar, were up 12%, quarter over quarter, which was primarily down to new growth opportunities secured by Everest at the January renewals.

At the end of the first-quarter third-party investors capital in the Mt. Logan Re sidecar totalled $315.168m. The sidecar had written reported gross premiums of $36.476m, by the end of Q1, with premiums earned reported as $26.557m and an underwriting gain of $9.521m. The Mt. Logan Re combined ratio stood at 51.3%.

Interestingly, analysts at Keefe, Bruyette & Woods suggested that the positive growth in gross and net written premiums at Mt. Logan Re could be a reflection of cedents and brokers increasing focus on a smaller group of larger reinsurers. We’ll have to see how the results from smaller reinsurance players compare in terms of growth.

We would also suggest that Mt. Logan Re may have been aggressively making the most of its lower cost of capital to secure business and as it raised a significant amount of capital, which it will have been required to deploy, that could also go some way to explaining the strong premium growth.

Keen to highlight the reinsurers use of alternative capital on both sides of its business, as a source of cost-effective risk transfer with its new catastrophe bond and as a source of fee income through managing third-party capital in Mt. Logan Re, Addesso said; “Alternative reinsurance capacity is increasingly part of our strategy, coming into play both offensively and defensively, as we seek ways to optimize our returns.

Optimising returns. A term you perhaps expect to hear from an investment manager more than from a company CEO. However, optimising returns on capital used and managed is the ultimate goal of any reinsurer and at the moment that means increasingly leveraging the lowest-cost capital and reinsurance capacity you can find.

With alternative capital continuing to grow in importance for the whole reinsurance market we can expect this new balancing act of owned (shareholder), leveraged (from third-parties) and managed (for third-parties) capital to increasingly feature.

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