For global insurance and reinsurance player Everest Group, the use of its third-party capitalized sidecar structure of Mt. Logan Re Ltd. is considered preferable to sponsoring catastrophe bonds or hedging with ILWs, according to CFO Mark Kociancic.
But the company recognizes that a mix of sources of capital protection is also desirable. So it doesn’t seem like we should expect Everest to completely move away from instruments like catastrophe bonds or ILWs, but it might put more emphasis on growing the Mt. Logan Re. structure as it goes. and as investor appetite and market conditions require.
Speaking on Everest’s recent third-quarter earnings conference call, CFO Mark Kociancic explained: “Whenever we talk about our capital protection, we always start with the raw risk we are underwriting. We basically want to be gross underwriters, not flow-throughs or anything else, in terms of using retrocessions, cat bonds and so on. So that’s kind of the starting point.
He was asked questions about the catastrophe bond program sponsored by Everest, under the name Kilimanjaro Reand whether it remains a priority source of risk capital and hedging for Everest and how the company currently views cat bonds.
Given the difficult context of the reinsurance market, Everest has consciously expanded into catastrophe reinsurance and also retains a larger share of the economy, it seems.made easier by the stricter conditions and higher attachment points, it is likely that much of this business will be written.
At the same time, Everest has raised new capital for Mt. Logan Re in recent months and by using the sidecar vehicle, it can earn fees and share some of its highest risk exposures with investors.
But there is still a place for catalytic bonds and industrial loss guarantees (ILWs), it just seems that in a tougher market environment Everest’s appetite for each of these is shifting a bit and will depend on a number of factors in the future.
Kociancic said: “So we have a substantial phasing of catastrophe bonds, you know, usually over a four or five year term. There are different layers that they attach to and our book also changes on the raw side from time to time.
“So we take into account the raw portfolio that we’re underwriting, we take into account our overall chat position, and then we start to modify. There are a few other factors that come into play.
The CFO then explained companies’ thoughts on how to select capital sources for hedging and risk sharing.
“Let me start with the easy stuff. We have the option to use and we prefer to use Mt. Logan, our third-party sidecar vehicle as much as possible in terms of coverage and alignment with the type of risk we take on property,” Kociancic said.
He added: “Tactical use of DMAs on a periodic basis is another tool we use. We use it proactively, based on where you know pricing and placement efficiencies for cat bonds and ILW, and then Logan of course.
“We also take into account the capital situation that you referred to in the May capital increase as an additional source of core capital for the company, so that definitely comes into the equation.”
Then saying, “Finally, I would add to the mix the economic capital at risk chart that we talk about frequently in our investor presentation and basically this space that we’re comfortable playing in shows that we have a lot of flexibility. broaden the appetite for risk within our tolerances for tail risk, profits at risk, and we tend to do that, especially when we see a higher margin on the types of risks that we underwrite, particularly real estate.
“So we take into account all of those factors that I mentioned in planning our capital protection going forward.”
As for why Everest let some of its Kilimanjaro Re catastrophe bonds mature recently, Kociancic said: “We made a conscious decision not to renew two bonds in the spring. We added another one at a different layer, but net-net, there was a reduction.
Adding: “We have significant capacity that is expiring, I believe it’s November, December, and that’s something we’re taking into account now, but I’ve given you the framework of how we let’s consider.”
Everest holds $425 million of Kilimanjaro Re catastrophe bonds maturing in December (the Kilimanjaro III Re Ltd. (Series 2019-1) issue), so it will be interesting to see if the re/insurer comes back to renew all of this.
Market conditions and pricing guidance will likely be key to this decision, as will the prospect of additional capital flowing into Mt. Logan Re, we imagine.
Kociancic concluded: “I can therefore assure you that given our ambition as a gross underwriter and our pursuit of superior risk-adjusted returns, we will look at options on the capital protection side in relation to our portfolio raw while we make these decisions.
Additionally, at Everest Group’s investor day on November 14, executives discussed Mt. Logan Re’s continued growth potential and the role it can play in optimizing corporate coverage.
Multiple forms of capital are used, each selected based on risk and suitability, executives explained during the Everest Capital Shield discussion.
Among the capital protection tools available to Everest, Mt. Logan Re has strategic priority, they reiterated.
While instruments such as catastrophe bonds and ILWs are considered more tactical, they will likely continue to be used.