No primary ambitions for Third Point Re, reinsurance only

Bermuda-headquartered investment-oriented total return strategy reinsurance firm Third Point Re, backed by hedge fund manager Daniel Loeb and his Third Point LLC firm, does not have an ambition to branch out into primary insurance underwriting.

According to Rob Bredahl, Third Point Re COO, despite the reinsurance market being at a low point in the cycle and as competitors seek to diversify into primary lines of reinsurance business, Third Point Re has no such ambitions.

Speaking to the Wall Street Transcript, Bredahl said that he believes the pure-play reinsurance model is dying at many competitor firms.

“A lot of them have given up on the pure-play reinsurance model,” he explained.

In the softened reinsurance market environment, companies are increasingly looking for both diversification and better sources of underwriting returns. Ways of achieving this include M&A, hiring new teams to expand into new lines of business, or branching out into primary insurance business.

For all but the largest reinsurers, primary insurance business could be a shock to the system, requiring a quite different set of processes when it comes to sales, servicing, claims management and settlement.

For a reinsurer like Third Point Re, which follows a total return approach of underwriting lower-volatility, longer tailed risks, while investing its assets more aggressively through Dan Loeb’s hedge fund strategies, the urge to expand is not as great.

The hedge fund or investment-oriented reinsurance strategy provides for a higher return on the asset side, meaning the company can cope with a lower return on the underwriting. That should enable reinsurers following this strategy to remain pure play.

Of course there is also a potential mismatch between offering primary insurance and investing the assets more aggressively, which might make primary business lines more difficult for a hybrid strategy re/insurer to pursue, except for in very large commercial, industrial, marine, energy or aviation type risks.

Bredahl explained; “For us, given what we do on the asset side of our balance sheet, we get plenty of risk-taking diversification through Third Point, our investment manager, so there’s no compelling reason for us to diversify into the primary insurance business.”

Bredahl also disagreed with the urge to merge and the desire for scale, that we see happening in reinsurance right now. He said companies involved in M&A often promote a narrative that scale is vital to survival, but he disagrees.

He explained that both brokers and cedents want more choice, not less and that Third Point Re is already seeing more business as a result of the mergers that have already taken place.

With only two mergers completed so far that suggests business is already leaking out of some of these, perhaps as cedents become more nervous about having narrower panels of counterparties. This could benefit ILS players as well, helping the larger ILS fund managers to get onto programs that perhaps were more difficult to access in the past.

The comments from Bredahl are interesting in the context of the launch of Richard Brindle’s Fidelis Insurance, which will underwrite both insurance and reinsurance as well as following an active investment strategy.

While primary risk underwriting is not for Third Point Re at this time, it’s clear that other investment-oriented re/insurers will emerge and will underwriting some primary business as well. It will be interesting to watch how the hybrid, hedge fund-backed, investment-oriented strategies diverge over time.

Of course getting a hybrid, underwriting and investment, strategy reinsurance firm to launch is not as easy as it seems. Third Point Re CEO John Berger told Bloomberg recently that as fund manager’s increasingly target the reinsurance space “it’s going to be increasingly difficult for new companies to form.”

He cited more stringent oversight from rating agencies as a blocker which has stopped a number of start-ups from getting to launch.

“We talk to the Best people frequently. And they say they see a steady stream of alternative capital coming in who just don’t understand how hard it is to start a reinsurance company,” Berger explained.

However Fidelis has shown that the business strategy can be a unique proposition and still get rated. Showing that it’s more about the team, the leadership, the backers and the depth of information and clarity on the strategy, than just turning up with a start-up pitch, a figurehead for CEO and an asset management strategy, as others are said to have tried in the past.

It looks like the strategy will indeed diverge, as new takes on the hedge fund backed reinsurer emerge. That should be positive for the insurance and reinsurance industry over time and it will be particularly interesting to see whether incumbents look to adjust their models to leverage some of the best bits of new start-up strategies.