Bermuda headquartered reinsurer Everest Re sees its fully collateralised reinsurance sidecar Mt. Logan Re Ltd., as core to its strategy for hedging peak exposures in its book, supplemented by the Kilimanjaro Re catastrophe bonds and use of industry loss warranties (ILW’s).
Everest Re has become a broad adopter of insurance-linked securities (ILS) strategies, bringing third-party capital into its reinsurance business and hedging instruments. That has resulted in a significant transfer and sharing of risk with capital market investors in recent years.
The Mt. Logan Re Bermuda domiciled reinsurance vehicle is Everest Re’s main strategy for both managing and deploying third-party capital within its underwriting business for investors. The collateralised sidecar strategy appears to hover around the $900 million mark, in terms of total third-party and Everest contributed capital.
In the last two years Everest Re has also embraced third-party capital through securitisation, offloading a significant amount of risk to investors through catastrophe bonds. The first issuance, a $450 million Kilimanjaro Re Ltd. (Series 2014-1) cat bond, was quickly followed by a second $500 million Kilimanjaro Re Ltd. (Series 2014-2) in 2014.
Now Everest Re is back to the cat bond market with what looks to be its largest cat bond yet, an upsized $625 million Kilimanjaro Re Ltd. (Series 2015-1), which would see the reinsurer as one of the biggest sponsors of cat bonds in the outstanding ILS marketplace.
So, that’s around $900 million in a sidecar and soon to be another $1.525 billion of third-party ILS investor capital from three catastrophe bond issues. But that isn’t it, Everest Re is also using industry-loss warrants (ILW’s) as a hedging strategy as well, which are likely to have been provided by one of the retrocessional focused ILS managers, so also capital markets backed.
Speaking during the reinsurers Q3 earnings call, John Doucette, the reinsurers Chief Underwriting Officer, explained the importance of this three-pronged approach to embracing ILS and alternative capital structures.
“Logan is core to our hedging strategy,” Doucette explained. “Supplemented by cat bonds, ILW’s, traditional reinsurance and retrocessional protection, we successfully enhanced our capital efficiency, while delivering meaningful capacity to support our underwriting strategies.”
Everest Re consolidates the results of the Mt. Logan Re sidecar within its reinsurance segment, reporting that the reinsurance portfolio, including Mt. Logan Re, generated $142 million of underwriting profit in Q3.
While that is down $77 million compared the prior year quarter, the reason is $100 million of losses from the Tianjin explosions and the earthquake in Chile. With Mt. Logan Re a core part of the hedging strategy, as well as providing efficient underwriting capacity, that might suggest investors will soak up a little of the exposure, at least for Chile.
Everest Re uses the third-party capital provided by Mt. Logan Re, the Kilimanjaro cat bonds and ILW’s alongside its reinsurance portfolio management, to enable it to shift capacity to more profitable parts of the market.
CEO Dominic Adesso explained that offsetting a decline in reinsurance premiums written, due to the challenging reinsurance environment, is; “The ability to move our capacity to more profitable but different layers, typically at higher attachment points, and therefore less premium per dollar of limit. This portfolio optimization is done in concert with our various hedging strategies, which include use of cat bonds, ILW’s and Mt. Logan.”
Adesson also explained that this use of ILS and third-party capital vehicles for hedging enables Everest Re to “right-size its risk, relative to the balance-sheet” providing it with broad global coverage for peak events, so it does not have to be so concerned about single event impact.
Adesso stressed the importance of the capital market initiatives, saying; “There are many new and exciting initiatives taking play at Everest, in both the reinsurance and the insurance businesses. The new products and the effective use of capital markets in the reinsurance portfolio, to line of business and geographic expansion in our insurance segment. These are all efforts that enable us to continue to generate superior returns on our capital compared to the overall market.”
Doucette added; “We continue to have the advantage of the various capital markets, convergence vehicles and structures that allow us to have capital efficiencies for the products that we sell and help the group get the most capital efficiency and the best risk adjusted return.”
Looking ahead, Adesso said that the capital markets moderated appetite for risk helps to signal that the decline in reinsurance pricing should slow down. Given, “What we see from capital markets perspective, it doesn’t look to me as if it should be a market that is continuing to slide dramatically,” he said.