Everest Re adds to hedges with ILW’s, Mt. Logan Re AuM stays flat

Everest Re, the global insurance and reinsurance firm, has been buying hedging protection in the form of industry-loss warranty (ILW) coverage in 2020, while catastrophe bonds and its Mt. Logan Re collateralised reinsurance vehicle also continue to play a key role in its protection for the all-important hurricane season.

Speaking during the Everest Re earnings call last week, President and CEO of the firms reinsurance division John Doucette explained how third-party capital continues to be a vital lever in the hedging requirements the company needs.

With retrocession markets potentially facing another year of losses, some of which will hit on collateral, while some ILS funds are also likely to take their share of Covid-19 losses resulting in more trapping of collateral, Everest Re is like all reinsurers exposed to potential increases in retro rates, as well as any reduction in retro capacity available.

“We have seen increased pricing there,” Doucette explained. Then commenting on ILS investors, “I think that alternative capital… we’re seeing and hearing a lot of noise about redemptions and frustrations with the losses and kind of a comparison to other places to deploy the capacity. So, I think there’s a lot of noise there that we think will continue for a while and that will have a direct impact on the retro market.”

One area of the ILS market that is less exposed at this specific time is catastrophe bonds, of which Everest Re is a major sponsor as part of its retro program hedges.

Doucette explained, “In terms of our hedges, we look at a whole suite of hedges and really try to build a holistic program that has different attachment points, different product types, different geographic coverages, different durations of how long they’re in place.

“As you will recall, we renewed our catastrophe bonds, we have almost $3 billion in catastrophe bonds in place, we renewed them in November, December, the ones that had expired, we bought lower down.

“In hindsight, we’re glad we took the capital that was available to us then, even though it had been a slight increase in rates. Those are multiyear deals and they’ll be in place for the next several years and because the pricing is already locked in, the cost of that capital, the cost of that or the rate-change embedded in that on a go-forward basis, is zero.”

Everest Re remains the largest single sponsor of property catastrophe bonds tracked in our cat bond Deal Directory and our data charts, with currently $2.625 billion of cat bond protection in-force.

As well as the catastrophe bonds, Everest Re also has its third-party capitalised, collateralised reinsurance sidecar style vehicle Mt. Logan Re, which as well as being a source of management fee income, is also a core component of its retrocessional capital stack.

Doucette commented on Mt. Logan Re, saying, “We also have Logan our strategic partner and Logan is about flat from January to now. We continue to use that as a very important hedging mechanism and the cost of that goes, basically, Logan rides up and down with us as they take quota shares of different layers and we build portfolios for them where they help us hedge.”

Doucette also explained that Everest Re buys traditional retrocession as well, although is price sensitive to this and who can blame them given the array of third-party capital routes to cede risk and secure capacity from.

Finally, Everest Re has been active in the industry-loss warranty (ILW) market in 2020 Doucette explained, saying that “We’ve been in the ILW market since January, looking and buying up ILWs as another way for us to hedge.”

The array of hedging tools available to a company like Everest Re are many and with its third-party capital activities a key piece of its overall capital and capacity for underwriting, these tools are likely to remain part of the capital mix for some time, albeit shrinking and growing depending on pricing and market conditions.