The scale of Everest Re’s fully collateralised reinsurance sidecar Mt. Logan Re Ltd. was evident in the reinsurers 2015 results, as the underwriting gain increased significantly year-on-year, although there was no change in size of the vehicle in the fourth-quarter.
Mt. Logan Re is Everest Re’s Bermuda domiciled sidecar-style reinsurance vehicle and the companies main third-party capital management strategy, enabling it to leverage efficient, capital markets sourced capital within its underwriting business.
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.” However the company stopped that growth in the second half of 2015, keeping the vehicle roughly static through the last few months of the year.
At the end of 2015 Everest Re reports shareholders equity (or redeemable non-controlling interest) in the Mt. Logan Re sidecar as approximately $757 million, up slightly from $753 million at the end of Q3 2015, but still very slightly below the mid-year figure of $760 million.
So it seems that Everest Re has found a size, which for the moment, works for the firm in terms of volume of third-party reinsurance capital managed and deployed within its business. Finding the right mix between owned capital and third-party sourced capital is important for any reinsurance company looking to leverage the capital markets.
It’s vital to achieve a return on capital managed which does not erode (or cannibalise) returns made on your own balance-sheet capital. At Everest Re the efficient capital from Mt. Logan Re has helped the company to expand more deeply into catastrophe reinsurance risks, particularly in the U.S., areas of the market where price declines may no longer make the business attractive for underwriting on its own balance-sheet.
Over the course of 2015 Mt. Logan Re has grown by an impressive 80% over the course of 2015, in terms of third-party investor capital managed within the vehicle. At the end of 2014 Mt. Logan Re’s non-controlling interests were reported as $422 million, so the vehicle has grown steadily throughout 2015 to the $757 million of third-party capital reported at the end of December.
With Everest Re previously maintaining an 85% third-party capital to 15% own capital split in Mt. Logan Re, as it shows it keeps its skin-in-the-game putting its own capital at risk alongside investors, overall the collateralised vehicle seems to still be around the $900 million size.
The growth over 2015, in terms of third-party capital managed and available to be deployed, is clearly evident in the income generated across the year.
For 2015 Mt. Logan Re underwrote $234 million of gross premiums, compared to $138 million in 2014. With a combined ratio improving to 34.2% in 2015, compared to 41.7% in 2014, Mt. Logan Re generated an underwriting gain of $124 million for the year, up from $73 million in 2014.
For the fourth quarter 2015 the increased scale is even more evident, with Mt. Logan Re reporting significantly higher results and more premiums written, as it puts its increased capital to work, demonstrating that even in a quieter quarter of underwriting the sidecar, or companion, reinsurance vehicle helps Everest Re to grow its overall book.
Analysts at Keefe, Bruyette & Woods noted that in Q4 Everest Re’s “Global Reinsurance premiums (including Mt. Logan) were essentially flat on a constant dollar basis.”
However, Mt. Logan Re’s gross premiums in Q4 2015 were up 72.3%, while premiums earned were up 65.3%, which have offset declines elsewhere in the reinsurance business.
This is important, as it is Everest Re using Mt. Logan Re and its lower-cost capital to navigate the market pressures, switching business from balance-sheet to third-party capital.
The third-party investors in Mt. Logan Re will also be pleased with the additional scale achieved in the vehicle in 2015, helping the vehicle to return almost double the income to shareholders in Q4.
$35.1 million of income was returned to noncontrolling interests for Q4 2015, up from $17.1 million in the prior year period. For the full-year 2015 $96.7 million of income was returned to Mt. Logan Re investors, up from $59.3 million for 2014.
So the size of Mt. Logan Re is clearly paying off for Everest Re, but at the same time the reinsurer has sensibly reigned in growth of the vehicle as it negotiates the market environment. The vehicle positions Everest Re very well to grow it further and it will be interesting to see whether it took more capital from investors for the January renewals.
Mt. Logan Re remains the largest vehicle we have included in our listing of collateralized reinsurance sidecars.