For the first time since the launch of its fully collateralised reinsurance sidecar Mt. Logan Re Ltd. in late 2013, reinsurer Everest Re has not increased the third-party capital managed within the vehicle in the last quarter.
Mt. Logan Re is Everest Re’s Bermuda domiciled segregated cell reinsurance vehicle and the reinsurers main strategy for managing and deploying third-party capital within its underwriting business for investors. Since it’s launch Mt. Logan Re has grown rapidly, becoming what Everest Re’s Chief Underwriting Officer termed “one of the fastest growing convergence vehicles.”
Reporting its Q3 2015 results yesterday, reinsurance firm Everest Re revealed that shareholders equity in the Mt. Logan Re sidecar actually declined slightly during the quarter. In previous quarters it has been more typical to see the sidecar equity grow, sometimes significantly, but over Q3 it remained relatively static.
At the 30th June 2015 Everest Re reported that third-party assets under management in Mt. Logan Re had reached $759.8 million, which represented 80% growth from $421.6 million at the end of 2014. The growth has stopped, perhaps a reaction to the more challenging and poorly priced core property catastrophe reinsurance market where Mt. Logan Re operates.
At the 30th September 2015 Everest Re reports that redeemable non-controlling interests in Mt. Logan Re actually fell slightly, to $752.7 million.
With Everest Re tending to operate an 85% third-party capital to 15% own capital split in Mt. Logan Re, as its way of demonstrating skin-in-the-game by putting its own capital at risk alongside third-party investors, that would put the sidecar still around $885 million to $900 million in size.
The slight reduction, of approximately $7.1 million, could be due to a redemption or could be down to losses suffered at Mt. Logan Re, eroding the value of the third-party investments during the quarter. Logan saw its highest losses, both attritional and catastrophe, for any single quarter in Q3.
The fact that Mt. Logan Re hasn’t grown in size at all suggests that Everest Re felt that the current assets are significant enough to maintain underwriting in the current market environment, and that pricing did not warrant raising any new third-party capital as the opportunities to deploy it profitably may not have been there.
For Everest Re as a whole the third-quarter looked better than previous ones, as it maintained a more stable level of underwriting across the whole business. In previous quarters Everest Re has pulled back, in some cases significantly, but much more stability was seen in Q3, as the reinsurer explained.
Gross written premiums were $1.7 billion, an increase of 3% compared to the third quarter of 2014. Eliminating the unfavorable effects of foreign currency fluctuations, total premiums were actually up 6%. Worldwide reinsurance premiums, including the Mt. Logan Re segment, were down 2%, on a constant dollar basis, while insurance premiums were up 34%, quarter over quarter.
The decrease in worldwide reinsurance premiums reflects the continued pressure on pricing in the global reinsurance market, something that will have hit Logan too.
However the reinsurers combined ratio rose a little, due to the impact of events such as the Tianjin explosions and the Chilean earthquake, which eroded profitability a little. However Everest Re still beat analysts expectations for the quarter and reported operating earnings per share of $4.53.
Despite beating expectations it has to be noted that Everest Re’s overall result of after tax operating income of $200.2 million, compared to $280.5 million in the prior year quarter is a reflection of the tough market conditions. It remains to be seen whether declines such as this would be sustainable if the market cycle remains softened for a prolonged period.
Everest Re President and Chief Executive Officer, Dominic J. Addesso, commented; “We are pleased with the results that Everest has achieved thus far this year considering the challenging market dynamics – both on the underwriting and investment fronts. After-tax operating income totaled $755 million through the first nine months of the year, despite a number of industry events, leading to a 14% annualized operating return on equity and a 4% growth in book value per share. Premium, on a constant dollar basis, was up 4% for the year, as we continue to seek out opportunities for profitable growth.”
On Mt. Logan Re alone, Everest Re reported $72.2 million of gross written premiums in the quarter, up from $50.3 million in Q3 2014. Net written premiums rose to $60.9 million, from $49.8m in 2014, translating into premiums earned of $50.8 million for Q3 2015, up from $38.2 million the year before.
Compared to a year earlier the combined ratio was high for Mt. Logan Re, perhaps part of the reason for the decline in value of the non-controlling interests. Mt. Logan Re saw a combined ratio of 47.3% in Q3 2015, up from 26.4% a year earlier, with $10.7 million of attritional losses and $5.8 million of catastrophe losses.
It’s not clear whether any of the Mt. Logan Re losses come from Tianjin and Chile, but given the way Logan underwrites alongside Everest Re, almost like a companion reinsurance vehicle, it is possible.
Commission, brokerage and expenses remained at under 10%, which helped to keep the combined ratio below 50% again for Mt. Logan Re. The losses did reduce the total underwriting gain for the quarter for Mt. Logan Re, coming in at just over $26.7 million, down around 5% compared to the $28.2 million in Q2 2015 and $28.1 million in Q3 2014.
Had Mt. Logan Re experienced attritional and catastrophe loss experience at a similar level to Q3 2014, its result in Q3 2015 would have been the first quarter with a $30 million plus underwriting gain and its best to date.
That perhaps demonstrates that attractive returns remain possible in this market, with the right reinsurance underwriting strategy. It’s worth pointing out that while Mt. Logan Re saw a little higher losses this quarter, its combined ratio remains half of the Everest Re Bermuda or International reinsurance arms.
That would imply that Everest Re is sticking to a strategy of selectively deploying Mt. Logan Re capital, alongside its own, into layers of risk where the attachment probability is lower, meaning less frequency. So, applying third-party reinsurance capital to the less frequent, but more severe type events, exactly where the capital markets play so well.
For the year-to-date, Mt. Logan Re has achieved an underwriting gain of $76.2 million, up around 60% from the $47.1 million it reported for the first nine months of 2014. Gross premiums written were up 67% in the same period, so reflecting the reduced pricing available and higher losses in the result, but lower expenses helped to bring down the impact to underwriting gain.
Everest Re continues to drive results with Mt. Logan Re, despite not increasing its size this quarter. It will be interesting to see whether Everest Re can grow Mt. Logan Re further for the January reinsurance renewal.
That would be a real sign of how catastrophe reinsurance pricing is in January. If the third-party collateralized reinsurance sidecars don’t grow it likely suggests that the opportunities to deploy the capital profitably just aren’t there anymore, which would be telling for the whole market.
Mt. Logan Re remains the largest vehicle we have included in our listing of collateralized reinsurance sidecars.