Bermuda based reinsurance company Everest Re has continued to have success in attracting capital markets investors to its Mt. Logan Re collateralized reinsurance sidecar, adding another $50m of third-party capital to it during the second quarter.
Everest Re’s latest quarterly report states that Mt. Logan Re helped the firm to grow its worldwide reinsurance premiums by 16% year-on-year for the quarter, as the reinsurer showed its strategy for combating the softening market, by writing more business across U.S. property and specialty reinsurance lines.
The Mt. Logan Re sidecar has become a core part of the Everest Re’s reinsurance underwriting business, with third-party capital raised from investors having grown rapidly up to the end of 2013, when the sidecar stood at $370m in capacity, $314.5m of which was from third-party investors.
Then, in the first quarter of 2014, Everest Re grew Mt. Logan Re a little further in time for the April reinsurance renewals. During the reinsurers April earnings call chief underwriting officer John Doucette reported that Mt. Logan Re was in excess of $400 million in assets managed and fully deployed.
At the 31st March 2014 the Mt. Logan Re sidecar had non-controlling interests of $315.168m, which would suggest that for the sidecar to have reached $400m+ of colllateralized reinsurance capacity Everest Re must have upped its initial $50m seed share, that it put in when the sidecar launched, to $75m or greater.
Now, at the 30th June 2014, the non-controlling interest (so the capital contributed by third-party investors) in the Mt. Logan Re sidecar had jumped again to $375.908m, according to the firms latest quarterly report.
So, if Everest Re now has a contribution of $75m or so in Mt. Logan Re, the sidecars total collateralized capacity looks to have reached around the $450m mark by the middle of the year. Or, if Everest Re is sticking to the 85% third-party capital, 15% own capital, rule the sidecar would now be around $442m in size. Further impressive growth either way and a clear demonstration of investor appetite to access reinsurance returns through sidecar structures.
Interestingly, looking at the latest report from Stone Ridge Asset Management, the New York based provider of mutual insurance-linked securities (ILS) funds, it’s clear that it is a major investor in Mt. Logan Re. The report shows $131m of investments in different classes or segments of Mt. Logan Re in Stone Ridge’s less liquid Interval fund, another $16m in its Risk Premium fund and $7m in its High Yield Risk Premium fund. So in total Stone Ridge looks to hold as much as $153m, or roughly one-third, of the Mt. Logan Re sidecar.
Everest Re is clearly writing more business with the help of Mt. Logan Re, the growth in its international reinsurance premiums would suggest this. So the strategy in having a sidecar seems to be bringing new business, which is one of the aims. The telling factor though is whether operating a sidecar of this size is more efficient and ultimately profitable than writing the business on its own balance sheet.
This is the goal of the reinsurer backed third-party capital unit, to add incremental business using third-party capital. As long as the overheads are lower, the business is incremental and the addition of management fees are positive, the strategy should be benefiting Everest Re and others like it. Unfortunately the benefits may not show as clearly in the current market environment.
Everest Re actually missed its earnings per share target this quarter, despite the growth in reinsurance, with analysts highlighting its higher expense ratios. If expenses grow, underwriting profit declines on pricing and more of the growth business is actually attributed to Mt. Logan Re, where profit is shared with investors, perhaps the growth is not so much a profit-making venture, right now, rather a way to expand in the hopes of reaping the rewards should the market harden?
The expense ratio jump is perhaps the first evidence of a need for reinsurers to begin to think of streamlining themselves to a degree. The cost of capital question will likely be raised once again. This also brings to mind the question of whether a sidecar is actually as efficient, in terms of cost of capital, as an ILS fund run by a dedicated ILS manager with a smaller team? Running a sidecar, or third-party capital unit, within a reinsurance company must knock a few basis points of the profits just in frictional costs of being in a large organisation.
As ever the results season raises more questions than it answers. Everest Re is clearly aiming for growth to maintain its profits, but the earnings miss will concern some. However the book of business written for Mt. Logan Re will prove itself over time and it may be that growing the sidecar turns out to be a very smart move.
Mt. Logan Re remains the largest reinsurance sidecar in the marketplace. In fact it’s the largest we have in our listing of collateralized reinsurance sidecars.
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