Bermuda based reinsurance firm Everest Re continues to approach capital markets investors to raise funds for its Mt. Logan Re sidecar and expects to meet, or possibly even exceed, its initial target of raising $250m of third-party capital by the end of 2013.
When Everest Re launched Mt. Logan Re at the beginning of the year, having seeded the reinsurance sidecar with $50m, it was targeting capitalisation of $300m by the end of the year, with $250m coming from third-party investors. As we wrote yesterday, the reinsurers third-quarter financial statement showed that Mt. Logan Re had non-controlling interests at the end of the third-quarter of $91.268m, which represents third-party capital within the sidecar structure.
In Everest Re’s third-quarter earnings conference call yesterday executives from the reinsurer discussed progress with Mt. Logan Re and said that they expect to hit the initial fund-raising target by the end of this year. The firm sees Mt. Logan Re as a way to broaden its reach in the reinsurance market and expand its capacity, using external sources of capital.
Dominic Adesso, President of Everest Re, said; “While still relatively small, we are expecting the additional capital raise from Mt. Logan to meet, or possibly even exceed, our goal for the year-end.”
Analysts on the call asked how Everest Re perceive the sidecar and how the firm treats the capacity it offers to its clients from the sidecar verses from its traditional balance-sheet.
Adesso explained; “We do not offer a separate Mt. Logan product into the marketplace. What Mt. Logan does is it actually allows us to increase our capacity and in essence Mt. Logan acts as a retrocessionaire to Everest.”
This suggests that Everest Re cedes portions of business to the Mt. Logan Re sidecar, rather than offering the client a choice over which capacity to select from. Operating a sidecar in this way, so the client does not need to worry about where the protection is sourced, rather that it is just Everest Re they are doing business with, is a traditional approach with a sidecar used to expand capacity.
Adesso continued; “The products that we are offering the marketplace continue to be the Everest brand and Mt. Logan is essentially invisible to the client. So the benefit of that, of course, is that clients are receiving increased capacity, increased lines from us with weighted paper, traditional paper, reinstatable cover, very much traditional product.”
Analysts asked Adesso what Everest Re is doing to differentiate, innovate and meet its clients needs, as it comes to terms with competing with an increasing pool of alternative reinsurance capital.
Everest Re, Adesso explained, is offering a reinstatement with the cover it offers and with Mt. Logan Re being essentially invisible to the client the product is to all intents and purposes traditional. This is not always the case in capital markets products, he explained, and some clients don’t find that appealing. He also mentioned the collectability of collateral as another issue which can put off clients, with respect to capital markets products, Everest Re is trying to get round this by purely using Mt. Logan as an extension of its own capacity.
Everest Re offers clients the same terms on cover whether it goes into Mt. Logan Re or not, Adesso explained that Everest is required to retain a portion of all the business that flows into the sidecar and so the firm uses its normal metrics to assess and price this. This means that the flow of premiums into Mt. Logan Re is consistent with those flowing into Everest Re’s traditional balance sheet.
However there are different ways to participate in Mt. Logan Re for investors. Joseph Taranto, Chairman and CEO of Everest Re, explained; “Investors have a choice as to which portions of the business they want to be involved with, including their risk parameters, which kind of leads to different potential ROE’s, so there are different ways to participate in Mt. Logan.”
Adesso was asked whether he felt the issue of reinstatements was solvable by the capital markets players. He responded; “Some of those features are already in the capital market products, so it’s not that it’s not a solvable problem, it’s just that it’s more difficult to accomplish given the risk appetite of investors, that’s all. The traditional product is a more seamless offering.”
Everest Re anticipates more capital coming into the reinsurance market at the January renewals, said Taranto, and that if the remainder of the year remains loss-free then some programs will see further rate reductions. Looking forwards Everest Re intends to continue to participate in large quota-shares, including in Florida, and Taranto commented that they do not feel too much competition from alternative capital in that area.
So Everest Re’s Mt. Logan Re sidecar is offering capital market and third-party investors a different way to participate in more traditional type of indemnity-based and reinstatable reinsurance business it seems. This is likely an attractive option, particularly for investors who already participate in index-based and catastrophe bond type investments.
With interest in catastrophe reinsurance from capital markets investors still high, and just $140m of its fund-raising target left to gather, Everest Re has every chance of hitting its target of $250m of external capital by the end of the year for the Mt. Logan Re sidecar.