Everest Re sees its Mt. Logan Re Ltd. collateralized reinsurance sidecar like vehicle as a core piece of the firm’s strategic catastrophe risk management, but the company is not looking to grow Mt. Logan Re just for the sake of growing, according to John Doucette.
Everest Re has a multi-capital approach to managing its catastrophe risk, featuring its equity balance-sheet, its catastrophe bonds under the Kilimanjaro Re program, traditional sources of retrocession, as well as Mt. Logan Re and the managed, collateralized reinsurance capacity that it provides.
The Everest Re capital stack grew to its largest ever size in the last quarter, as we reported earlier in the week.
At the recent renewals, Everest Re bulked up its retrocessional reinsurance protection by adding a new aggregate retro layer to it.
The new aggregate property retrocession contract, which Everest Re secured in the second-quarter, is designed to “help protect us from a large catastrophe loss or series of mid-sized losses,” John Doucette, the firms Executive Vice President and President and CEO of the Reinsurance Division said during an earnings call this week.
“This retro program was designed to refine the shape of our portfolio,” he explained, “Further diversifying our capital structure, reducing our volatility, adding flexibility to allow us to deploy our capital into interesting and unique opportunities.”
In particular Everest Re is also building its protection in specific areas, as it sees a chance of improvements in market conditions ahead and wants to be ready to take advantage of them.
Doucette said that the retro purchase will position Everest Re to “capture improvement opportunities in the property space, including at January 1st 2020,” citing the issues of dislocation in the retro space, trapped capital as potential drivers of improvement, but with the retro also enabling the firm to better manage its property book exposures.
Looking ahead Doucette explained that the issues affecting the ILS market mean there is a good chance that rate improvements continue into the January 2020 renewal season.
“The ongoing trapped capital from 2017 and 2018 losses and the subsequent market loss deterioration are pushing ILS investors to retrench,” Doucette said.
This means investors and ILS players are looking to withdraw capacity where they do not feel returns are commensurate with the risk and “demand better pricing and terms.”
“The resulting dislocation in several property reinsurance markets and global retro capacity will likely continue for the upcoming January renewal,” he explained.
Doucette believes that the recent years of catastrophe losses, trapped capital and then ongoing loss creep are going to result in some investors cycling out of ILS, leaving a healthier level of overall capital in the market and suggesting better conditions at 1/1 2020.
“I think all of that will map to a healthier reinsurance market and healthier retro market,” he continued. Adding, “The alternative investment manager is going to be held to higher standards on transparency, rate change, collateral release and things like that. All of that points, to us, to a healthier property market in 2020 at January 1 and beyond.”
The retrocession helps to position Everest Re to take advantage of opportunities that emerge, but it is just one part of the companies strategy, alongside its cat bonds, industry loss warranties (ILW’s), other traditional retro and of course Mt. Logan Re Ltd.
While the market environment could point to opportunities to raise more capital for Mt. Logan Re, Everest Re is in no hurry to expand the vehicle it seems.
Instead it’s viewed as one of the core strategic levers within its catastrophe risk management, alongside the other protections and cessions Everest Re has in place.
“We are well capitalised and not reliant on any one capital source to finance our underwriting risks,” Doucette said.
“Mt. Logan is a core strategic vehicle for us, as we manage our catastrophe risks,” he continued.
Adding that it’s only one of them though, and it will fluctuate in size as Everest Re “will turn the dial up and down.”
On raising capital for Mt. Logan Re, Doucette said, “We have continued to add and look to add investors into the mix and in the normal course of business we will continue to do that. But we’re not trying to grow for the sake of growing.”
“It’s one of the strategic dials, it has very specific values to Everest. But so do some of the other ones,” Doucette said. “So we look across all of these as part of the holistic hedging strategy and structure that we have and we have the ability to turn up and down other dials as well.”
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