Everest joins Bermuda surge in the SPI space

Everest Re announced on Friday the formation of Bermuda-domiciled special purpose reinsurer, Mt. Logan Re, through which it will extend global collateralised property cat capacity to the market.

Everest Re indicated that the company will provide initial funding to the tune of $50 million, with third party capital expected to raise capacity to $250 million.

Everest Re chairman and CEO, Joseph Taranto said of the deal that “for Everest this vehicle adds yet another tool to our underwriting arsenal that allows us to meet the dynamic demands of the reinsurance marketplace and enhance the returns of our investors."

The move follows in the footsteps of other Bermuda markets, who have been actively forming sidecars and special purpose re/insurers (SPIs) in recent weeks.

Bermuda Re spoke with Arthur Wightman, partner—insurance leader at PwC in Bermuda about the rising level of interest in the SPI space.

“The convergence train of 2012 has steamed straight into 2013 with little drop in momentum. A variety of deals have been announced, with a proliferation of sidecar structures as well as further activity in the reinsurer managed funds space. This brings to the fore many opportunities as well as questions about the emerging model for reinsurance, and retrocession in particular, for property catastrophe risks. Most poignantly, it suggests an emerging model that is responsive to both the needs of cedants looking to offload risk, and the choices they demand between risk transfer and risk financing, as well as one that focuses on strategic choices between equity and third-party capital sources."

Will this additional capacity serve to take the top off the traditional reinsurance market?
Basic economics would confirm this as supply increases. It depends on how you look at it though. Cedants have demonstrated an increasing level of comfort in tailoring their programmes to shift risk to both traditional reinsurance offerings as well as securitised products. Arguably we should therefore talk about the reinsurance market as whole and then it just comes down to a question of capacity.

Discussing January renewals, there is no doubt that pricing in certain areas has been tempered by this additional 'non-traditional' capacity, but similarly many argue that, particularly in the retrocessional market, there is plenty of room to manoeuvre without an impact on pricing. Arguably, however, from what we have seen evolve - particularly in Bermuda - reinsurers are adjusting their strategic focus to the market to offer cedants the full range of what they want. In doing so, and depending where pricing is better, they can adjust capital allocation.

Is being in the sidecar and SPI space now the only game in town?
Not necessarily, but the level of activity in this space does point to how seriously the reinsurance market is now taking ILS and alternative forms. Whether it is part of a well evolved and long-standing strategy or a more responsive action to secure convergence growth, reinsurers are building out their capability to secure market share or grow the market overall, and sidecars and other securitisation vehicles are a key part of that equation. I would tend to agree that this activity is taking precedent over new long-term equity backed formations of the like we last saw in 2005, but we are seeing certain new formations taking a different approach, namely asset manager sponsored plays into reinsurance. It is safe to say that the market is rapidly evolving with no one model being adopted wholesale.

Will the addition of such vehicles help to strengthen book value and increase investor confidence in those Bermuda re/insurance companies participating in the space?
This is a difficult topic. On the one hand, you have equity investors in insurance and reinsurance companies with their own unique (and longer-term) objectives and third-party capital providers who may or may not share those objectives, and who could well have a shorter term focus. On the other hand, the business rationale for seeking out flexible capital sources when needed, to service a multifaceted strategic agenda - one that complements the market imperative to provide traditional reinsurance with fully-collateralised products with managing insurance-linked funds for investors - can be seen to be accretive to the value of those same re/insurers. As with all good strategies though, the value comes from its transparent establishment and agreement with boards, sound execution using the right talent, and translating its value back to the investors supporting it.

Why are Bermuda players so active in this space at present?
Simplistically, Bermuda has long-established itself as the place to reinsure catastrophe risk. Its innovative reputation has also been earned from having the talent capable of evolving the reinsurance model. For many years, Bermuda has been at the centre of providing fully-collateralised reinsurance solutions to facilitate investments in reinsurance capacity. What we are seeing now is an evolution based on the current economic climate. It is attractive today to source external funds for deployment as secured reinsurance capacity. Moreover, this type of capital can better support reinsurance company objectives around managing tail risk. The activity that is happening in Bermuda is prescient. It sets the course for the evolution of the reinsurance model - one where reinsurance companies actively incorporate fund management as a core competency.