Bermuda reinsurance firm Everest Re appreciated its largely third-party capital funded fully-collateralized reinsurance sidecar Mt. Logan Re during 2013, as the vehicle helped the reinsurer to write larger lines while better serving its clients.
Everest Re sees the capital markets and third-party capital from investors more as a tool than a threat, according to Dominic Adesso, President and CEO of Everest Re. Adesso said that Everest Re sees its third-party capital facility, the Mt. Logan Re reinsurance sidecar, as; “Another form of capital that can be used to deliver well underwritten products.”
However, Adesso explained that capital markets backed reinsurance capacity is not always the best solution and that Everest Re appreciates the flexible structure of having both third-party capital reinsurance capacity as well as its own company equity capital.
Adesso commented; “Capital markets is not a perfect fit for all risks and this is where company capital can be deployed into new products and risks not well suited to a capital market structure. The world is changing as it always has. It’s how one adapts to it determines if it can beat the average.”
As property catastrophe reinsurance rates have trended downwards during 2013 Everest Re has been shifting capacity to better priced layers of risk and a mix of new products offering the best return profile.
Third-party reinsurance capital from investors is now a core part of the reinsurers strategy, enabling it to focus the lower-cost, capital markets sourced capacity on property catastrophe reinsurance business and putting its higher-cost equity capital to work in more profitable areas.
Craig Howie, Chief Financial Officer at Everest Re, gave an update on the Mt.Logan Re sidecar financials. Mt. Logan Re’s financial position and results were consolidated into Everest Re at July 1st 2013, said Howie, and the results showed a $9m underwriting gain with $3m going to Everest itself and $6m attributable to third-party investors in Mt. Logan Re.
Mt. Logan Re recently completed its capital raising, reaching approximately $370m in assets under management, $314.5m of which was raised from third-party investors.
Howie commented on the successful capital raising; “This serves to validate Mt. Logan’s business model as investors recognise the value proposition of partnering up with a leading global reinsurer.”
Chief Underwriting Officer at Everest Re, John Doucette, then gave an update on activities at Mt. Logan Re, explaining how the collateralized reinsurance sidecar brought benefits to the reinsurers platform last year.
Doucette said; “Globally, we saw the benefit of Mt. Logan Re in 2013, as we chose to deploy larger lines on deals and increased our cat capacity for key clients.”
Everest Re uses Mt. Logan Re to help the reinsurer optimise its returns from reinsurance business, by focusing the lower-cost, third-party investor sourced capital where it can be most effective.
Doucette explained; “Logan allowed us to manage our net P&L while growing our topline and having additional flexible capital management, such as Logan gives us more flexibility to manage our P&L before winter season.”
Mt. Logan Re helped Everest Re to secure larger signings and to increase its prominence in other lines, by keeping key clients happy through the extra, lower-cost capacity.
“In several cases, providing clients with more property capacity resulted in securing better signings on deals we wanted in other classes,” commented Doucette.
While Everest Re has fully embraced third-party, non-traditional reinsurance capacity through its Mt. Logan Re sidecar, putting this capacity to work alongside traditional to great effect at the renewals, the reinsurer cannot avoid the competition from non-traditional reinsurance capacity.
Doucette was positive on this; “We are successfully competing with, and winning against, non-traditional capacity everywhere. In many instances, Everest won placements despite offering higher prices due to our ratings and diversified 40+ year franchise. The breadth of our trading relationships with clients globally and our ability to tailor solutions to meet clients’ needs and to design products that benefit from structural advantages we have over competitors, have all proven to be significant competitive advantages.”
Doucette continued, highlighting some of the factors that keep traditional reinsurers relevant and attractive to cedents; “Unlike the non-traditional markets Everest’s promises to pay does not expire. Nor do we force a collateral release mechanism into products earlier than the natural expiry of the liabilities being reinsured.”
Everest Re also offers a retrocessional reinsurance product named Purple, providing retro cover on a pillared basis, which competes directly with some non-traditional retro providers and third-party capital or ILS products. Doucette said that Everest Re has found good demand for a rated balance-sheet retro product, saying; “Our Purple premium was up significantly at 1-1 2014, as long-term clients clearly preferred to buy this product from Everest’s highly rated traditional balance sheet.”
Everest Re intends to continue to flex its business focus between traditional and alternative capital, core lines of business or new products such as Purple, wherever the best return opportunities are available.
This has been the typical response from the traditional reinsurers to the competition posed by alternative reinsurance capital and judging from the current quarter results it seems to be an effective strategy currently but time will tell how effective it will be over the longer term if ILS and alternative capital continues to flow into reinsurance.
Dominic Adesso discussed how capital markets initiatives are assisting the reinsurer in managing capital and profits. Adesso said; “With Mt. Logan Re and other capital market initiatives, whether it’s traditional reinsurance or otherwise, we think we can grow our overall book very profitably and keep the P&L to a level that we’re comfortable with and it will be accretive to our shareholders.”
Everest Re is a good example of a large, global reinsurance firm which has reacted to the influx of alternative and ILS capital into the market, both by leveraging third-party capital itself to help it deploy its traditional capital more effectively and by flexing its strategy to avoid highly competitive lines of business.
This kind of strategic capital management, between traditional and non-traditional, equity and alternative or ILS, is going to be a major feature of 2014. Later this year we should begin to get a picture of how effective this has really been for large reinsurers like Everest Re but, in the meantime as reinsurers use more and more third-party capital, the opportunities for investors to participate in reinsurance should continue to grow.