We jumped the gun slightly on Mt. Logan Re yesterday, saying it had reached $500m at the end of December 2014, as the firm said that additional capital of $270m was raised for the January renewal, taking Everest Re’s collateralized reinsurance sidecar closer to $810m in size, we believe.
The $500m figure was as of 31st December 2014, including third-party capital and Everest Re’s share in the vehicle, so did not include the additional capital inflows and outflows that have occurred in the Mt. Logan Re sidecar for the January renewals.
During Everest Re’s earnings call yesterday, John Doucette, Chief Underwriting Officer, revealed that the firm had raised an additional $270m of capital from investors for the sidecar and that for the January renewals the assets under management in Mt. Logan Re hit around $690m.
This $690m of assets under management in the Mt. Logan Re sidecar that Doucette reported looks like it reflects just the third-party capital, as the firm raised an additional $270m and it had reported third-party non-controlling assets of $421.6m at the end of December.
So, on that basis, if the $690m is just the third-party capital non-controlling assets share of the Mt. Logan Re reinsurance sidecar, and Everest Re has maintained its 85%/15% share in the vehicle, it would put the total capitalisation of the sidecar at as much as $810m.
This continued impressive growth of the Mt. Logan Re sidecar reflects Everest Re’s appetite to be expansive and to use third-party investor capital as a way to boost its line sizes, underwrite business which does not meet the requirements of its balance-sheet and to better manage its capital and lower the cost of it.
With the Mt. Logan Re sidecar, alongside $950m of retrocessional capacity sourced from catastrophe bonds, including the $450m Kilimanjaro Re Ltd. (Series 2014-1) and the $500m Kilimanjaro Re Ltd. (Series 2014-2), as well as use of industry loss warranties (ILW’s) and other third-party capital retro tools, Everest Re which is an $8 billion capitalised company can be argued as “operating more like a $10 billion capitalised company,” CEO Dominic Adesso said.
That’s significant. Almost 20% of the reinsurers capitalisation now comes from ILS and third-party capital tools, perhaps the most dramatic adoption of the use of the capital markets by any reinsurance company so far.
Doucette explained how this helps the reinsurer; “We believe this highlights and validates our property cat retrocessional strategy, with the increased use of Logan, Kilimanjaro issuing $950 million of cat bonds and other non-traditional and traditional cessions to manage our net catastrophe PMLs and lower our cost-of-capital. As a result of these strategies, our net ROE continues to be greater than our gross ROE in our worldwide property cat book.”
CEO Adesso commented; “Due to our capital structure, which effectively includes Mt. Logan and our sponsored cat bonds, we have the ability to put out more capacity with the same or less net peak zone P&L exposure and better risk-adjusted returns.”
Doucette said that the full capitalisation of the Mt. Logan Re sidecar was deployed at the January renewals, which will set the vehicle up to maximise returns over the course of 2015. It may prove very wise to have deployed it all at 1/1 if reinsurance rates decline further at the mid-year renewals once again.
During 2014 Mt Logan Re generated around $28m of fees for Everest Re, Doucette explained.
CFO Craig Howie also discussed the growing contribution from Mt. Logan Re, saying; “The Mt. Logan Re segment reported a $26m underwriting gain from the quarter, compared to a $4m underwriting gain for the same period last year. For the year, Mt. Logan reported an underwriting gain of $73m compared to a $9m gain in 2013.”
So scale of the sidecar really does matter and is resulting in an increasing contribution to Everest Re’s results from third-party capital.
Doucette said that Mt. Logan Re has helped Everest to take on larger lines with certain cedents on attractively priced property catastrophe treaties, where perhaps the reinsurers balance sheet alone could not have.
“We continue to see robust ongoing investor appetite for the Everest-Logan value proposition, highlighted by Logan’s best in class risk-adjusted returns to investors,” Doucette said.
As Everest Re shifts almost 20% of its capitalisation into third-party capital management, the issue of how revenues compare to underwriting on its own balance-sheet come to mind. With reinsurers like Everest Re returning capital to investors, in share buybacks and larger dividends, but then taking other investor money to grow underwriting, it has to be considered whether the ultimate revenues can be as high.
However, in Everest’s favour is the fact that this seems to be supporting largely incremental growth through the use of third-party capital, as well as providing optimisation of its capital structure and ultimately a reduction in its cost-of-capital as well.
Mt Logan Re remains the largest reinsurance sidecar in the market by a very long way and shows just how ambitious Everest Re has been with its use of third-party reinsurance capital over the last year or two.