Third-party reinsurance capital, insurance-linked securities (ILS) and its collateralized reinsurance sidecar Mt. Logan Re all provide reinsurer Everest Re with an additional source of financial leverage, of sorts, according to CEO Dominic Adesso.
During the reinsurers second-quarter earnings call, Adesso explained that third-party capital initiatives such as Mt. Logan Re and other similar initiatives, allow the reinsurer to present more meaningful capacity to its clients, which helps it to secure placements “at terms which are acceptable.”
This trend, of leveraging third-party capital to boost underwriting ability, will continue into Q3 Adesso said, particularly with the additional capital buffer provided by the firms first catastrophe bond issue, the $450m Kilimanjaro Re Ltd. (Series 2014-1) as well as some purchases of industry loss warranty (ILW) capacity.
As a significant market in the reinsurance sector, with around $7 billion of capital at play, these strategies act as a sort of financial leverage, Adesso explained, allowing Everest Re to “lever that up even further.”
The financial flexibility afforded by Everest Re’s partnership with third-party capital, through the catastrophe bond, the Mt. Logan Re sidecar and ILW purchases it has made, enable the firm to continue to return capital to investors through share repurchases while still growing the business.
Chief Underwriting Officer John Doucette continued, adding that Everest Re’s use of capital markets convergence, both offensively and defensively, allows it to maximise efficiencies for clients and value for its shareholders.
Doucette said that with Mt. Logan Re now a year old, it represents a successful partnering of Everest Re with third-party reinsurance capital “to opportunistically grow and deploy capacity in the catastrophe risk market.”
The sidecar structure was validated again at 1st July with more new investors coming into Mt. Logan Re, further raising the sidecars assets under management, Doucette continued. As we wrote last week, Everest Re has added another $50m of assets to Mt. Logan Re in recent weeks, taking its AuM up to $400m or so.
The increase in Mt. Logan Re assets was even after paying some profits back to existing investors, Doucette explained. “We continue to believe that the Logan structure adds value to both clients and shareholders. Our clients and brokers benefit from Everest being able to deploy more capacity on deals and layers which are attractively priced,” Doucette said.
Having this access to both a rated balanche sheet of shareholder capital, as well as unrated pools of capital from third-party investment partners, allows Everest Re to; “Deepen client relationships while managing our capital and PML’s while achieving higher risk adjusted returns and improving our cost of capital,” Doucette continued.
Executing the Kilimanjaro Re catastrophe bond and some ILW capacity also helps Everest Re to become more capital efficient and trim some of its probable maximum losses, Doucette said.
Even with the price of risk around the world having decreased in many areas, the use of these capital markets and ILS strategies helped Everest Re to compete, win, grow and build shareholder value in any market condition, Doucette added.
The use of third-party capital at a large traditional reinsurer like Everest Re increasingly looks to be a good strategy, in terms of the additional leverage it provides and the way it allows them to grow by providing clients with enhanced solutions. Questions still remain over the ultimate profitability of managing someone a third-parties capital over your own and whether having a lower-cost of capital also needs a lower cost of sale (expense ratio).
The efficiency of a global reinsurance firm and whether it can continue to profit while increasingly using someone outside capital will play out in coming years. For the moment, for Everest Re, the strategy appears to be working very well and adding an ability to grow which could position the firm well should the market become more attractive for deploying its own capital.