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

Global reinsurance firm Everest Re’s Mt. Logan Re collateralized reinsurance sidecar and the use of instruments such as catastrophe bonds and ILW’s are helping the reinsurer to reduce its cost-of-capital and position itself for growth and profitability.

The Mt. Logan Re third-party investor backed, fully-collateralized, reinsurance sidecar underwriting vehicle is Everest Re’s capital markets play for managing institutional investor money within its business. By providing investors with a vehicle to access and share in the returns from reinsurance business underwritten, Everest Re is acquiring efficient underwriting capital to put to work alongside its balance-sheet capital.

The sidecar is clearly a successful initiative at Everest Re, with it regularly coming up in the firm’s quarterly earnings statements and conference calls. The reinsurers third-quarter 2014 results show that Mt. Logan Re grew again, with an additional $30m of third-party capital coming from ILS investors, such as Stone Ridge Asset Management, taking the sidecar to $404.411m of third-party capital at the 30th September, with a total size of around $480m including Everest Re’s share in the vehicle.

During the results conference call yesterday, Chief Underwriting Officer John Doucette discussed Everest Re’s use of third-party capital on both sides of its book, by managing investors capital within the Mt. Logan Re sidecar as well as for retrocessional purposes and capital management with catastrophe bonds, industry loss warrants (ILW’s) and retrocession.

Doucette said; “We are seeing underwriting successes in many different areas of our book, driven in part by our investments in several initiatives over the last several years, including Mt. Logan our capital markets facility, to position ourselves for future, long-term, growth and profitability.”

Mt. Logan Re and the relationships that Everest Re has built as a result, with third-party investors and ILS specialists, help the reinsurer to achieve key strategic goals, Doucette explained, broadening the firms offering and making it increasingly attractive to clients.

“Mt. Logan continues to help us to execute our longer-term strategic goals, as we are now managers of third-party capital we have more tools in our underwriting arsenal to help us achieve our objective of being the go-to broker-reinsurer for all brokers and clients around the world,” Doucette explained.

One of the key aspects of using a sidecar for growth, as Everest Re has chosen, is the ability to leverage the efficient, capital markets money, to protect its balance-sheet from being exposed to too much additional risk, while still allowing the balance-sheet to take its share of the risks by having money in the vehicle and by underwriting alongside it.

“The additional capacity provided by Logan and our other hedges has enabled Everest to grow the topline, without materially increasing the risk to our balance sheet,” Doucette commented.

It’s clear that both the management of third-party capital and the use of it for hedging purposes, work together for Everest Re, protecting the balance-sheet, furnishing it with capital for growth, allowing it to manage its capital better and also allowing for the portfolio to be optimised.

Doucette continued; “At the same time has allowed us to generate fees. In turn, Logan’s investors have enjoyed superior returns relative to similar vehicles in this space.”

So for Everest, in terms of financial gain due to Mt. Logan Re, there is the acquisition of fees for managing investors capital as well as the additional balance-sheet boost provided by using this pool of capital, alongside its own, for growth and to underwrite larger lines.

For investors in Mt. Logan Re, clearly Everest Re feels that the returns being achieved by the sidecar are superior to other similar vehicles, which if true should help it to continue growing Mt. Logan Re for future renewal seasons.

“Logan exceeded its return targets to investors in its first full year of operations. This was driven partly by a relatively benign catastrophe loss season. But more importantly it was a function of the broadly diversified portfolio that Logan, in partnership with Everest, can create for its investors,” Doucette said.

Everest Re is in an interesting space in the reinsurance market at this time. A global player, but not in the top four, it stands to benefit from insurance companies shrinking of reinsurer panels. This is because as a cedent you are unlikely to put too much focus on the top players, but if you want to shrink your panel you are more likely to push additional business to players of the size of Everest Re.

Taking advantage of this market dynamic at the same time as making its capital base more efficient, through the use of third-party capital, could be a very shrewd move for Everest Re with fantastic timing to help it to secure its place in the market for the future.

Further growth of the sidecar is expected as well, said Doucette; “We continue to have significant interest from new investors for Logan and expect Logan to grow both in dollars of assets under management as well as the number of new Logan investors throughout 2015.”

Perhaps the biggest benefit of leveraging third-party capital within its reinsurance business for Everest Re is the efficiency of the capital markets, the structures offered by ILS and their ability to help the reinsurer to lower its cost-of-capital. Hence it does not use Mt. Logan Re to underwrite new types of business, or to seek a different return to its balance-sheet, rather it uses the sidecar to increase its capacity in areas of the market it finds attractive.

“With Logan, the Kilimanjaro cat bonds (Kilimanjaro Re Ltd. (Series 2014-1) was Everest Re’s first cat bond, issued this year), ILW purchases and other traditional and retrocessional protections and hedges, we are succeeding in lowering the cost-of-capital required to support our property catastrophe book. Creating fee income for Everest to enhance our underwriting income and building a very attractive risk adjusted portfolio for our shareholders,” Doucette explained.

In the current market environment, reducing your cost-of-capital is a key way to increase (or maintain) the real returns from your underwriting business and Everest Re has been focused on this for the last two years or more and is having demonstrable success it appears from the results.

In terms of the real money value that Mt. Logan Re brings to Everest Re, CFO Craig Howie explained; “The Mt. Logan Re segment reported an underwriting gain of $28m for the quarter and a $47m gain year-to-date. Everest has retained $5 million of this income and $42 million was attributable to the non-controlling interest within this entity. This compares to $1 million that Everest retained year-to-date last year.”

A $28m gain in a single quarter from approximately $480m of assets under management is around 5%, which suggests that Mt. Logan Re could gain approximately 20% in a year, or perhaps even more when it really gains and benefits from the scale Everest has built. Very impressive and sure to be a strong draw for future investors in the sidecar.

The benefit of leveraging this external investor capital on both sides of its book for Everest Re is clear and Doucette summed this up very well in a single sentence; “That helps us find more business that is accretive to earnings on our current level of capital.”

Growing a business without increasing your own balance-sheet capital, to acquire or fund the growth, is very attractive for any business and by leveraging third-party capital, as a manager of it in the Mt. Logan Re sidecar, and using it for hedging with cat bonds, ILW’s and other vehicles, is providing just this opportunity for Everest Re.

President and CEO of Everest Re Dominic Addesso summed this up well, when asked about the reinsurers ambitions with alternative capital, by saying; “Mt. Logan for us is where we see more immediate term growth in the alternative capital space. As John pointed out 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. So we see it as a tool, not a threat and it’s just another form of capital that allows us to manage our own capital more efficiently.”