Bermuda-based reinsurance firm Everest Re has continued to gradually increase the size of its third-party capital backed, fully-collateralized reinsurance sidecar Mt. Logan Re Ltd., meaning the vehicle is growing its contribution to results.
Update: It turns out the $500m figure was as at 31st December 2014 but for the 1/1 2015 renewals Everest Re raised an additional $270m of third-party capital, taking Mt. Logan Re nearer to $810m in size we believe.
Everest Re launched the Mt. Logan Re sidecar in January 2013, with $250m of capital, and has steadily grown it since as opportunities allowed. By the end of 2013 Mt. Logan Re grew to $370m in capacity, $314.5m of which was from third-party investors. Then it hit around $400m in April 2014, followed by $450m at mid-year 2014, and finally $480m at the end of Q3 2014.
In its latest results statement, Everest Re reported that non-controlling interest (so the capital contributed by third-party investors) in the Mt. Logan Re sidecar had grown again to $421.6m (up from $404m at the end of Q3 2014). Everest Re aims to maintain an 85% third-party capital, 15% its own capital mix in the Mt. Logan Re sidecar, which would put the sidecar around the $500m mark in total capitalisation at the end of 2014.
Also, Everest Re reports third-party investment cash flows in noncontrolling interests as around $136m for 2014, which would be aligned with this kind of growth rate.
Everest Re has been expansive in the currently softened and challenged reinsurance market, growing its premiums written steadily over the last year. The latest set of results are no different, and the Mt. Logan Re sidecar is playing an increasingly important role.
Everest Re reported $1.4 billion of gross premiums written in Q4 2014, up 7% year on year. Over the full-year the firm increased premiums written by 10%, to $5.7 billion, with growth of 15% in the global reinsurance segment which includes Mt. Logan Re.
CEO Dominic J. Addesso commented; “Everest has had another stellar year with 10% growth in premium, 15% growth in operating earnings per share, and 16% growth in book value per share, adjusted for dividends. While it is a challenging marketplace, Everest continues to find and create opportunities for profitable growth due to our broadly diversified platform. Post January renewals, we remain confident in our ability to continue to generate strong returns for our shareholders.”
Everest Re has definitely been helped by the low catastrophe loss environment of recent years, enabling it to report increasingly strong results. The firms combined ratio came in at 80.5% for the quarter and 82.8% for the year, compared to 81.5% and 84.5% the year before.
Overall, income was up for the fourth quarter and roughly flat for the year, reflecting the lower rates that the reinsurance Everest Re underwrites will have achieved.
Specifically for the Mt. Logan Re sidecar, Everest Re reports gross written premiums of $138.4m for the year in 2014, up from just $20m in 2013. Q4 saw the sidecar write over $29m of premiums, compared to just $7m in Q4 2013.
Mt. Logan Re reports an underwriting gain of just over $73m for the full-year 2014, helped by a loss ratio of just 24.4%, and a combined ratio of just 41.7%, down from 48.8% in 2013. This impressive low loss experience will please investors in the vehicle.
Income attributable to noncontrolling interests, reflecting money returned to investors as income from Mt. Logan Re, is reported as almost $60m for the full-year 2014, up from just under $6m in 2013, showing how scale increases the benefits to investors in these third-party vehicles as well.
Notably, Stone Ridge Asset Management, the New York based provider of mutual insurance-linked securities (ILS) funds, held around $154m of Mt. Logan Re investments at the end of October 2014. All of these positions had been acquired during 2014, at a rough cost of $132m, which appears to indicate a return on this capital invested in the sidecar of almost 17%. It should be noted that these investments are in different tranches of Mt. Logan Re shares, which likely have differing returns and risk levels.
However, the experience of Stone Ridge would appear to indicate that Mt. Logan Re looks very profitable for investors, based on how much the value of its investments in the sidecar have increased over time.
So Everest Re has continued on its growth mission through 2014, it is almost the only major reinsurance firm to have been expansive in the softening market environment. Mt. Logan Re is enabling the reinsurer to be expansive, likely helping it to maintain positions on business that does not suit its balance-sheet.
Will this expansive approach in a low rate environment prove to be successful? At the moment, while losses remain low, it certainly looks it. However, being expansive also helps Everest Re to become a larger reinsurance partner and to secure positions on new programs, which if the market turned and rose in pricing, would be beneficial as well.
How the results will look after the next major U.S. catastrophe loss event will be telling though, as to be expansive in a market where others are pulling back, might suggest that some of the new business written has been turned down by others. Only time will tell how disciplined this expansion has been.
Mt. Logan Re meanwhile, is serving its purpose as a collateralized reinsurance sidecar, enabling Everest Re to offer fully-collateralized cover, lower-cost capital to its ceding partners and providing another capital tool with which it can manage its underwriting appetite.
Mt. Logan Re continues to be the largest reinsurance sidecar at the moment and the largest we have in our list of collateralized reinsurance sidecars.