Another Bermuda launch

SAC Re joins Third Point Re and PAC Re in a group of hedgefund-backed reinsurers that have launched on-island in 2012. Able to draw upon the enviable investment management capabilities of SAC Capital Advisors, LP, a global investment management firm headquartered in Stamford, Connecticut, the company is looking to take a disciplined approach to its reinsurance underwriting that will generate attractive returns through market cycles. Simon Burton, a veteran of the Bermuda insurance scene who has lived on the Island for 19 years, is bullish about its prospects.

Why did SAC Re opt to establish its presence in Bermuda?

We considered various options through a comprehensive process, but in the end, Bermuda emerged as the clear choice. There is an established marketplace, a respected regulator and a large pool of skilled personnel, which in my opinion makes Bermuda the best place to start a reinsurance company.

Which lines of business are you looking to write and where do you see SAC Re developing its offering?

Ours is a very specific plan: to write a mixture of property cat reinsurance business—a global book with a North American focus—and low severity casualty classes, which will include auto and home owners’ general liability, and workers’ compensation, among other classes. We will also be offering specialty property products such as terrorism, weather and facultative, although the market opportunities there are limited at the moment.

How do you foresee rolling out those lines?

We launched the company on July 9 and received our first underwriting submissions that week. The underwriting team in place includes Claude Lefebvre as chief underwriter for casualty, with the property book currently overseen by me and Peter Skerlj, head of risk and analytics. Kathleen Reardon will join us by the end of the year as chief underwriting officer for property, subject to Bermuda immigration approval, and we anticipate further building out the team reporting to Claude and Kathleen in the near term.

Underwriting talent is one of the most important elements of any reinsurer. How did you go about assembling your team?

In my view the team is critical. Following a 9/11 scenario or a Hurricane Katrina, it can be a challenge to build a team under severe time pressure. Over the past year, we had the time to assemble an exceptional executive team and I believe we achieved that.

I prefer underwriters to have both a deeply thoughtful and analytic background, and a market-facing, commercial aspect to their underwriting. Fortunately, in the Bermuda market these days there are a number of very talented underwriters who fit that profile.

Where can reinsurers achieve a return in today’s soft market cycle?

That’s a big question. However, I would not describe pricing as uniformly soft, with peak peril property cat rates looking pretty healthy at the moment. Over the medium-term, it is a great business to be in as long as you take a clear-minded approach to the parameter risk. Cat products are volatile by definition, but there is a big difference between writing defined perils cover for a US client, versus all perils in an international zone where the credibility of exposure data and understanding of perils can be quite poor. The Thailand floods event of 2011 is a perfect example, in that reinsurers paid claims for perils that were never contemplated.

On the casualty side, it’s a tough time to be an underwriter. Margins are thin and new money yields don’t provide the economic buffer that they used to. Parameter risk is still there, but adverse results emerge through a slower burn, and I think that leads to deeper troughs in pricing than the short-tail products. That said, I believe that we have constructed a business plan that side-steps these pitfalls. Our niche casualty product is not predicated on a real swing in casualty rates. In particular, our low severity, capped quota share product can provide valuable surplus relief to a client at efficient cost while we put the float to work via our investment strategy.

How are you looking to differentiate your offering from that of more established players? Is diversification no longer the means to do so?

You are quite right that diversification on the property side has resulted in a great deal of pain over the last few years, given the run of international losses. Clients are quite correctly concerned about their reinsurers’ ability to pay in a given loss scenario, so our differentiation comes not from the product itself, but from our relatively low cat risk leverage and advantaged investment strategy.

Our casualty product is different as we are able to drive meaningful economics from low margin, relatively predictable quota share business where many others cannot, by investing the float in funds managed by SAC Capital, which we anticipate will generate higher returns than a traditional reinsurer investment portfolio.

Many worry that new entrants are making an opportunistic play. What do you say to such critics?

We constructed a plan that works through the cycle, both for reinsurance pricing and variable conditions in the capital markets. The upshot of that exercise is a strategy that over the medium term is expected to exceed either a pure investment strategy or a pure reinsurance plan, so it’s compelling for all the right reasons. There are other clues to the permanence question such as our use of the SAC brand and my mandate to build an exceptional, Bermuda-based team. We have all worked hard to get here and we look forward to building a company for the long term.

I imagine you are expecting that when the capital markets pick up, you will be able to benefit fully from the relationship you have with SAC Capital?

Looking back, SAC Capital has a tremendous history of generating high quality returns. One thing that I looked at in considering SAC was its Sharpe Ratio, which measures return per unit of volatility. SAC’s Sharpe ratio has consistently run at a high level compared with its hedge fund peers or the broader capital markets. Consequently, while improving markets would most likely benefit SAC as well as its peers, we are more interested in SAC’s record of producing a high quality return over an extended period and across different market scenarios.

Do you expect other hedge funds to follow in the footsteps of PAC, SAC Capital and Third Point?

The recent start-ups are evidence that the reinsurance model appeals to hedge funds for a number of reasons. That said, not all of them will be an appropriate partner to a reinsurance company. Liquidity, a low volatility profile and appropriate risk management are key to any reinsurance investment strategy, and not all hedge funds meet those criteria.