Third Point Re – less hedge fund investing, more catastrophe underwriting

Bermuda headquartered, hedge fund backed reinsurance firm Third Point Re is pivoting further away from the longer-tailed underwriting, more active investment approach of its original strategy, as it embraces catastrophe risk once again.

As one of the main proponents of the total return or hedge fund reinsurance strategy, Third Point Re has seen its results fluctuate, as the underwriting side struggled to get to a sub-100 combined ratio and the investment side swung wildly from losses to higher returns.

The strategy has always been a volatile one, with the kind of large bets made on the hedge fund investing side by Third Point LLC’s Daniel Loeb leaving the reinsurer in a volatile position where its results could be wiped out by one negative quarter.

On the flip side, of course, a positive quarter on the investment side could also offset consecutive quarters of underwriting losses.

But this volatility in the results of Third Point Re has led the reinsurer to seek out ways to smooth earnings somewhat for its shareholders, while still offering them a way to tap into the investment prowess of Daniel Loeb, but with greater certainty coming from the underwriting side at the same time.

Enter catastrophe risk underwriting, something that Third Point Re originally undertook from its launch but largely for third-party capital investors in the Third Point Re Cat Fund which it shuttered back in 2014.

Third Point Re announced a return to catastrophe risk underwriting in late 2018, when the company said that it would write the class of business for its own balance-sheet, as a way to help reduce its combined ratio.

Property catastrophe excess of loss reinsurance is being underwritten by Third Point Re and the firm believes that this addition is going to help it move towards generating an underwriting profit within a year or so, as our sister publication reported recently here.

That should please the rating agencies that had turned negative on the reinsurance firm due to its seeming inability to get the underwriting side of its business into profitability under its pre-catastrophe risk underwriting strategy.

The company has seen attractive opportunities to underwrite more catastrophe risk at renewals so far this year, having reentered that market at a time when rates have been seen to harden.

An underwriting focus has been developing at Third Point Re over the last year, good preparation for its pivot back towards shorter tailed property catastrophe business, as a complement to the longer-tailed risks it continues to underwrite as well.

Changes at the top have also been seen in recent weeks, resulting in a new CEO and structure and some of the executives focused on the development of the property catastrophe book taking on more senior roles.

So, it’s not at all surprising to also learn that the company is now becoming less focused on the hedge fund investments than it used to be as well.

The old strategy, of writing longer-tailed business with durations that allowed Third Point Re to generate investment float that could be allocated to strategies managed by Loeb’s Third Point LLC was just fine before the introduction of the shorter-tailed property catastrophe risk.

When writing property catastrophe risk, the importance of having capital available to pay the necessary claims cannot be understated, given that claims will result more frequently from that book of Third Point Re’s business.

As a result, there needs to be a more easily accessible pool of premium float to support the claims needs of the property catastrophe underwriting business at Third Point Re and so the company has adjusted its investment strategy to suit.

The change means Third Point Re has reallocated $350 million of its investment pot immediately into more liquid and easily accessible fixed income strategies and expects to reallocate additional amounts as the property catastrophe reinsurance book builds in size.

The reinsurer aims to remain investment oriented as its headline strategy, but these shorter term, more liquid investments, will help Third Point Re to develop a property catastrophe business that aligns with the needs of its ceding companies, while providing the income smoothing and reduction to the combined ratio that it seeks.

The implementation of the new property catastrophe risk underwriting strategy is going to be all in the balance, of writing just enough lower-combined ratio business to moderate the overall underwriting result while only taking so much investment float away from the Loeb invested strategies to enable the higher returns to be generated.

The total return, investment oriented or hedge fund reinsurance strategy has yet to really show what it can do in the industry, having been embraced, hybridised and also seen to fail at a mix of companies.

Third Point Re is among the longest-standing proponents of the strategy, but to date has been beset by the variability in the investment returns alongside the inability to get the underwriting combined ratio under control.

The addition of property cat risk could help the company demonstrate what the hedge fund backed strategy is really capable of delivering, if the underwriting can be break-even then the investment strategy gets its chance to shine.

Hence, it’s going to be interesting to see how the firms results develop over time, as the catastrophe portfolio matures and the combined ratio comes down, although financial market volatility is always going to be a threat to the investment returns.

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