Bermuda domiciled re/insurer Everest Re has stressed the importance of thinking outside the box to create opportunities in the marketplace, underlining the benefits of its collateralized reinsurance sidecar vehicle Mt. Logan Re Ltd., which helps the firm write business.
Speaking with A.M. Best at the 5th annual Rio de Janeiro Reinsurance meeting in early April 2016, Ronald D. Diaz, senior vice president (SVP) and international department head at Everest Re, noted a need for product and operational creativity in order to find opportunities in the region.
The Latin American reinsurance space remains underdeveloped when compared to other markets, such as the U.S. and Europe, but challenges in the global reinsurance industry means that Diaz’s advice applies globally, as companies from all domiciles continue to see rates diminish and growth potential limited.
“There are opportunities if you create a new product, a new way to distribute an old product, using new channels for distribution. At Everest we’ve been pretty creative. We’ve actually started to use third-party capital to help us write,” said Diaz.
“We have created a third-party capital manager called Logan Re. That has about a billion dollars in third-party capital that we also use to help us with writing our business,” said Diaz.
Everest launched its third-party capital backed reinsurance sidecar Mt. Logan Re in January 2013, with initial capitalisation of $250 million of which $50 million, or 20% came from Everest itself, with the remaining $200 million coming from capital markets investors.
Over time Everest has managed to successfully increase the size of its collateralized reinsurance sidecar vehicle, while also reducing its own capital contribution as a percentage of the overall capital base of the Mt. Logan Re vehicle.
Artemis reported earlier this year that at 1/1 Everest Re increased the size of Mt. Logan Re to $860 million, while also reducing its capital contribution to $50 million, or 5.8%, which suggests that third-party investors now contribute a substantial 94.2% of the vehicles total capitalisation.
Most recently, in fact just this week, Artemis reported that Mt. Logan Re has grown again to $1 billion, with $950m of that capital coming from third-party investors, another milestone for the collateralised reinsurance vehicle.
Being able to embrace the wealth of alternative reinsurance capacity, currently willing and able to be deployed in the space is increasingly seen as an important part of reinsurance business models moving forward.
The increased maturity and sophistication of the investors and sponsors within the insurance-linked securities (ILS) market has seen it develop from its infancy to a very influential force in the global re/insurance landscape.
As a result industry analysts and experts have increasingly underlined the importance and benefits of working with third-party investor-backed capital, to improve efficiency and also diversify their capital flow in a bid to remain relevant.
Everest Re is an example of a reinsurer really embracing the features, structures, and capacity of the capital markets and its investor base.
Along with its Mt. Logan Re sidecar the firm is also fairly active in the catastrophe bond space, which Diaz explains it uses “to help reduce our retained cat exposure.”
With more than $1.5 billion of cat bond volume in the outstanding market, as recorded by the Artemis Deal Directory, Everest Re currently sponsors the third largest volume of outstanding cat bonds, in terms of capacity issued.
Everest Re utilises Mt. Logan Re not only for its own retrocessional requirements, but also to assist with its own underwriting, as highlighted by Diaz.
By leveraging the vehicles lower cost-of-capital Everest Re benefits from an additional avenue for underwriting income, something that is extremely valuable in the challenging reinsurance landscape where rates are diminished and investment returns hard to come by.
Utilising alternative reinsurance capacity alongside its own capital enables the reinsurer to diversify its reinsurance operations, with sophisticated and efficient capital providers.
The continued growth of Everest Re’s Mt. Logan Re sidecar is a sign of the increased investor confidence with the vehicle, and also the ongoing benefits the venture brings to Everest’s reinsurance business operations.
Profitability on both the investment and underwriting side of the balance-sheet is challenging for reinsurers in the current market dynamics, but as highlighted by Everest Re and Diaz, creativity and the ability to embrace third-party capital can create opportunities and most importantly, additional, or supplementary profitability.
Mt. Logan Re remains the largest vehicle we have included in our listing of collateralized reinsurance sidecars.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.