As hedge fund reinsurance structures evolve, Everest Re may consider: CEO

by Artemis on November 4, 2014

Bermuda headquartered, global reinsurance company Everest Re may consider looking at adding additional alternative and third-party capital units, such as hedge fund backed strategies, as these structures evolve and become suitable, according to its CEO.

When asked during the reinsurers third-quarter earnings call where Everest Re see the evolution of the reinsurance market going, with issues such as primary insurers ceding less risk, increasingly participation from third-party and capital markets money, hedge fund involvement and the range of emerging reinsurance capital strategies, CEO Dominic Adesso said that the reinsurer is keeping its options open.

Everest Re already has a successful fully-collateralized, third-party capital backed reinsurance sidecar. Mt. Logan Re, as we reported earlier this week, has now raised over $400m of third-party capital, taking the sidecar’s total capacity to around $480m. As a result, Mt. Logan Re’s contribution to Everest Re has grown and is helping the reinsurer to be more expansive.

Catastrophe bonds are the other piece of the alternative capital pie for Everest Re right now, with the reinsurer launching its second cat bond transaction just this week. The $350m U.S. and Canada earthquake bond Kilimanjaro Re Ltd. (Series 2014-2) is currently out being marketed to investors.

So Everest Re is clearly embracing third-party capital and leveraging it across its business. But according to Adesso if the structures evolve to a stage where Everest can see a real benefit, it could even launch some type of hedge fund reinsurer strategy. Although for the moment Mt. Logan Re is the real focus for using alternative capital to help it grow its reinsurance book.

“Mt. Logan for us is where we see more immediate term growth in the alternative capital space. We would still expect there to be increased assets under management there and for us that is a strategic play where we’re actually, as I mentioned before, able to deploy more capacity through the use of that facility,” Adesso explained.

Adesso feels that pricing in reinsurance is nearing the bottom, particularly within the third-party capital arena. Everest is noticing this both in the cat bond market and also from feedback coming from investors in its sidecar as well.

Adesso said; “Certainly on the capital market side there seems to be some evidence that we’re certainly trading near our bottom, particularly as you look at cat bond pricing. And even some of the things that we see going on in our capital markets facility Mt. Logan where investors are hitting some floors with respect to the returns that they would expect.”

On the topic of adopting some type of hedge fund strategy, Adesso doesn’t feel that the strategy is currently right for Everest Re, given its focus on shorter-tailed reinsurance lines. This also means that while others are putting longer-tailed lines into hedge fund reinsurers it is not reducing the underwriting pool of opportunities for Everest currently.

“Typically the premium going into those types of vehicles will be more casualty focused business, which frankly for us right now has not been a growth area for us, so we would not anticipate any major impact from some of the early movers into that space,” Adesso explained.

In their current form Adesso remains slightly skeptical about the hedge fund reinsurer strategy. He said; “It’s still early days with respect to hedge fund capital coming in. My early view on this is that it’s very difficult to raise capital into these structures and that doesn’t mean that they won’t exist, but it’s not clear to me at this point that it will be a huge part of our business at least at this point.”

But Adesso, while not ready to embrace this strategy yet, is keeping an open mind as it evolves; “If in fact that evolves to be something different and it’s likely that it will be more attractive to investors to invest into that space, Everest would certainly be prepared to consider that as one of its platforms, not unlike what we’ve done with Mt. Logan.”

So, if the hedge fund reinsurer strategy evolves to a point where it can perhaps leverage a sidecar type approach to the business of raising capital and underwriting, while applying a more aggressive investment strategy on the back of that vehicle, then Everest Re may be interested.

The hedge fund reinsurance strategy is in its very early days. The above is certainly one of the directions it could go in, which would allow reinsurers like Everest Re to hire a team to underwrite longer-tailed business, provide them with an underwriting structure backed by third-party capital (akin to a sidecar) and allow them to partner with a hedge fund or asset manager for the investment strategy.

That would be a low-friction way to enter that space, without the need for setting up a separate company. Investors would clearly have to agree to the investment strategy and the fact that collateral would be invested more actively than in usual collateralized structures and some form of leverage may also be required. But given the dramatic changes that third-party capital has brought to the reinsurance market, there is every reason to think that a merging of some of these strategic directions could be the next evolution.

Adesso summed it up well, showing that he and Everest Re remain ready to move on any new opportunities or structures that emerge and are suitable for the reinsurer. Alternative capital remains a key component of the reinsurers future; “We see it as a tool, not a threat, and it’s just another form of capital and allows us to manage our own capital more efficiently.”

Other recent Everest Re related news:

Collateralized reinsurance sidecar Mt. Logan Re appoints Tobin as CFO.

Everest Re launches $350m Kilimanjaro Re 2014-2 catastrophe bond.

Mt. Logan sidecar & cat bonds help Everest Re lower its cost-of-capital.

Everest Re grows Mt. Logan Re sidecar again to approx $480m.

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