M&A doesn’t make sense for us, market to get tougher: Third Point Reinsurance

Bermuda-based hedge fund strategy reinsurer Third Point Reinsurance, which is backed by hedge fund manager Dan Loeb’s Third Point LLC, is not among the reinsurers looking for scale though a merger or acquisition process at the moment.

“We’re very happy with the way thing’s are going, so something would have to be really attractive to us,” CEO John Berger commented at the Bank of America Merrill Lynch insurance conference earlier this week.

It’s not that Third Point Re wouldn’t like to add scale, rather it’s due to the strategy which makes M&A more challenging and less attractive to the firm.

“A negative to any type of acquisition is, if you go into a U.S. domicile or a European domicile, there are usually restrictions on how you can invest the money. So that would be a negative and one of our strengths is that we can tell people that our money is managed on a pari passu basis, as Third Point manages their portfolio,” Berger continued.

“If we have to deviate from that, that changes the story,” Berger explained, adding that valuations of the deals currently in the market would also be an issue.

COO of Third Point Re Rob Bredahl, also speaking at the BAML event, said that potential deals are being presented to the firm.

“They come to us in two types. Impaired companies where you can buy below book value, but we just don’t have the management capacity to fix broken companies. Or if they’re well run companies they typically get bid up to over book, and then the numbers just don’t work. We don’t expect any merger to make sense in the near-term,” Bredahl explained.

The lack of M&A opportunities is not holding Third Point Re back from seeking to grow its business though and the firm is currently in the process of expanding into the U.S., with the launch of a new company.

Bredahl said that the U.S. focused reinsurance entity would be capitalised with at least $265m initially, with support from the existing company through a quota share agreement and the debt deal that Third Point Re is about to close financing with a bond sale amounting to $115m. The rest of the financing is coming from the reinsurer itself.

Berger commented on the proposals being made by the U.S. IRS and Treasury regarding hedge fund reinsurer tax, but said that Third Point Re feels it can manage to either of the proposals it has seen to date. Interestingly, though Berger said that Third Point Re has not been directly approached by the IRS or any other U.S. government entity about the issue.

On market conditions for reinsurers Berger said; “I think it will get tougher and tougher.”

Reinsurance buyers are getting bigger and smarter, Berger said, meaning that even the biggest reinsurers are exposed to the challenging environment. Third Point Re has an advantage on the investment side, he continued, as what the firm can do with the money when it receives it, compared to a traditional investment strategy, can make the difference and help it to outperform.

Bredahl said that he sees no hope for change in the margins for catastrophe reinsurance business at this time, which were historically the largest margin area of reinsurance. He said he sees no going back and that “the margins on catastrophe business have changed forever.”

Berger added on recent M&A activity; “One and one rarely equals two. There will be fallout as a result of this.”