Mt. Logan Re, the third-party capital backed collateralised reinsurance sidecar vehicle operated by Bermudian re/insurer Everest Re, has grown by approximately 9% during 2016, emerging for the 1st January 2017 renewals with $867 million of assets under management.
The size of reinsurance vehicle Mt. Logan Re fluctuates both from year to year, and also throughout the year, as investors come in and out of the vehicle over different terms. In the past Mt. Logan Re has been at almost $1 billion, but the end of year figures show the steady growth in assets that the collateralised reinsurer has experienced on a year to year basis.
At the end of 2013, its launch year, Mt. Logan Re’s assets under management reached $370 million. The reinsurer then near doubled its assets to $689 million at the end of 2014, before growing again to $799 million in time for the January 2015 renewals.
The continued growth through 2016, coming out the end of the year with $867 million of assets to deploy at the 1/1 2017 renewal, shows the ongoing interest in reinsurance linked investment strategies and with Mt. Logan Re offering a range of return opportunities, compared to much of the ILS market, the continued growth shows that investors are receptive of such returns (ranging from 7.4% up to as high as 20.2% in 2015).
2016 was, as readers are no doubt aware, a year when the reinsurance and ILS fund sectors both experienced higher catastrophe loss activity. In fact global insured catastrophe losses in 2016 were the highest since 2012, driven by earthquakes, wildfires, severe weather, flooding, and tropical cyclones.
Mt. Logan Re could not avoid all these loss events during the year, as you’d expect given the globally diversified property catastrophe underwriting focus. As a result Everest Re’s fee income and earnings from its share and management of the collateralised vehicle were down at $11 million for 2016, compared to $28 million a year earlier.
“The decline in 2016 essentially represents the higher level of catastrophe losses in 2016 and the corresponding reduction in incentive or profit sharing fees,” Everest Re CFO Craig Howie explained in the reinsurers earnings call yesterday.
Everest Re maintains a share in Mt. Logan Re, having invested $50 million at the launch of the collateralised reinsurance strategy, which was as high as 15% of the vehicle at the time.
At the end of 2016 we understand that Everest Re’s share in Mt. Logan Re is below 10%, so it looks like this contribution has not changed significantly over time.
Mt. Logan Re underwrites a diversified range of catastrophe exposures, across a range of geographical regions around the globe.
The vehicle offers investors a number of different share classes to invest in, from the lower risk layers where returns are typically expected to be sub-10%, to the higher risk where 20% or higher is possible, as some investors saw in 2015.
For Everest Re the ability to cede reinsurance risks to Mt. Logan Re offers a way to access risks that are perhaps less suitable for its balance-sheet, under the current soft market conditions, while earning fee income for underwriting and managing the risks and capital.
Alongside the re/insurers almost $1.6 billion of Kilimanjaro Re catastrophe bonds, Mt. Logan Re offers the company an efficient source of retrocession, an expandable pool of capital markets-backed underwriting capacity and a source of fees to complement its other earnings.
Of course these capital markets strategies don’t just allow Everest Re to maintain its underwriting in areas of the reinsurance market where its balance-sheet is not as efficient, it also allows the company to target underwriting much larger layers of risk where its balance-sheet alone could not support them.
In this way the company is leveraging alternative capital to help it maintain footholds in softened markets and grow into others. A two-pronged strategy that can augment the balance-sheet and result in more profitable opportunities being embraced by the company.
Mt. Logan Re also benefits Everest Re as a source of retrocession as well, with recoveries received in 2016 from events such as the Fort McMurray wildfires and hurricane Matthew during the year.
Hence continued, steady growth is important and welcomed by Everest Re, we’d imagine, as it finds its overall underwriting platform expanding and its efficiency raised thanks to the contribution that alternative capital now makes.