Mt. Logan Re, the collateralized reinsurance sidecar vehicle of global reinsurer Everest Re, has doubled the amount of premiums it underwrote in the first quarter, compared to the prior year, which on top of an improved combined ratio will deliver attractive returns to its investors.
Everest Re has been steadily growing the Mt. Logan Re fully collateralized reinsurance sidecar, as it aims to reduce its overall cost-of-capital by leveraging third-party capital and insurance-linked securities (ILS) on both sides of its business.
As we reported in February, the Mt. Logan Re sidecar had grown to around $800m in total capitalisation for the January renewals, as Everest Re sought to shift an increasing amount of its property catastrophe reinsurance underwriting onto third-party balance sheets.
Everest Re announced its quarterly results yesterday, revealing another record quarter for the firm and an increase in its underwriting. Mt. Logan Re continued to play its part, as the reinsurer increased its use of the sidecar year over year.
Worldwide reinsurance premiums underwritten for the quarter, including the contribution from Mt. Logan Re, are up 4%. However at the same time net premiums written have not grown as quickly overall and this is partly due to the way Everest Re cedes business into Mt. Logan Re as retrocession.
In terms of the growth of Mt. Logan Re over the last year, Everest Re now reports that redeemable non-controlling interests in the vehicle, so the third-party shareholder capital that is reported, grew from $421.6m to $603.6m in the year. That’s an increase of 43% in just one year.
With $603.6m of shareholder equity and Everest Re working on an 85% third-party capital, 15% its own capital within Mt. Logan Re, it suggests that Mt. Logan remains at $800m or greater. There may be more third-party capital in the vehicle through different methods, which perhaps are not reported like the shareholder equity has been.
In terms of premiums written by the Mt. Logan Re sidecar in the quarter the increase since Q1 2014 is almost a doubling.
Everest Re reported $36.5m of gross premiums written by Mt. Logan in Q1 2014, but in the 2015 quarter that has grown to almost $74m. On a net basis Q1 2014 premiums totaled $26.6m, but this year $59.6m, again a near doubling.
Premiums earned in Q1 2014 were $19.5m, but in 2015 rose to $34.6m. Overall underwriting gain at Mt. Logan Re came in at $21.3m, far eclipsing the Q1 2014 result of $9.5m.
The difference in underwriting result is due to a much improved combined ratio at the sidecar. In Q1 2014 the attritional loss ratio was much higher, at 31.1%, while in Q1 2015 it has come down to 21.5%. The overall combined ratio is a very attractive 38.5%.
So, more capacity deployed, premiums written and earned and a lower combined ratio will result in an attractive return for investors in the Mt. Logan Re sidecar for this quarter just ended.
The Mt. Logan Re combined ratio is the lowest of all segments reported by Everest Re, by a significant margin, which largely demonstrates the efficient capacity tool that a sidecar can provide to a reinsurance platform.
The attritional loss ratio that Mt. Logan Re saw in the quarter is also much lower than the other segments, which will again please investors as it suggests that the business ceded into Mt. Logan Re is perhaps less volatile to attritional catastrophe and weather events, although it may be more exposed to major cat losses, which of course we have not seen of late.
Analysts KBW said that Mt. Logan Re’s gross written premium growth was significantly above expectations, while net was also ahead of where they had foreseen it. KBW calculates Everest Re’s share of Mt. Logan Re’s underwriting profits as $5.2m, more than double the analysts $2m forecast.
It’s another impressive underwriting quarter for Everest Re as a whole, and especially for Mt. Logan Re which will deliver another positive return for the last quarter to its investors.
Of course how the sidecar reacts when we do see large catastrophe events hitting the market is the real test, but the longer investors see attractive returns for the easier it may be for them to be absorbed, and for investors to recapitalise the sidecar, when bigger losses do happen.