Expansion towards profitability

Dan Malloy, the chief executive officer of Third Point Re, is upbeat about the strides the company has made over the past few years on the back of a recruitment drive, restructuring its portfolio and eyeing a new approach to the way it interacts with technology.

Malloy explains that over the last two years the company has been expanding its underwriting team, in order to deliver on plans to write a more diverse portfolio of business which would include new, higher margin, lines of business.

He believes the onset of a hardening market will make for an increasingly competitive hiring environment, with executives looking to reap the rewards of bigger profits by moving between re/insurers.

“It is hard to be an incumbent in a softening market because you have to be responsible. But in a hardening market there will be a lot of competition between insurers, reinsurers and brokers,” he says.

Despite this, the company has made a number of high-profile hires, including David Govrin from Berkshire Hathaway, who became president, Third Point Reinsurance (USA); David Drury from Chubb, who is now executive vice president, underwriting–global head of property catastrophe reinsurance of Third Point Reinsurance (USA); Tracy Gibbons and her team from Allied World, with Gibbons now in charge of Third Point Re’s specialty treaty portfolio; and most recently David Sinclair from Trans Re, who is now senior vice president, marketing and investments.

“That’s the team who are supporting our growth in Bermuda,” Malloy says.

A change of focus

Third Point Re is focusing on writing more property cat and specialty lines business. Malloy says the reinsurer has written approximately $60 million this year so far in those new lines of business. Although its focus turned to specialty only in the second quarter of the year, he sees good growth potential, suggesting that this time next year it might be writing somewhere in the region of $80 to $85 million in gross written premium (GWP).

Malloy says Third Point Re’s main goal is to improve the profitability of its portfolio, which was originally structured for growth. Now, it wants to move towards lines with better margins, moving its combined ratio, which was 106.8 percent last year, closer to the mid-90s percent in the process.

Malloy explains that this target will be achieved by adding these more profitable new lines of business plus improvements in the company’s existing book, which has averaged around $600 million of GWP over the past few years.

Malloy adds that the market is at the start of a new cycle where insurance companies are achieving year-on-year rate increases.

“These are desperately needed due to the losses that are coming through the market from various lines of business, outside the headline property/cat lines,” he says.

“Those companies are our clients, so a large share of our $600 million in business is seeing underlying rate increases and underwriting improvements, but we’re also then seeing improvements in reinsurance terms and conditions.

“We feel relatively confident that even if you put no weight on the underlying improvements outpacing loss trends, we feel the terms and conditions and changes in the mix of that portfolio would produce 200 to 300 basis points.

“We’re seeing that loss ratio come down year on year.”

New cats

Malloy is upbeat about Third Point’s re-entry into the cat market this year after a hiatus since 2015 when it closed the catastrophe fund it managed and co-owned with Hiscox.
Back then, Third Point’s cat exposure had come via the fee-generating structure of the fund, but as rates fell those fees had been increasingly squeezed, making it harder to generate decent returns from the business.

This time around it chose a different structure, despite the hardening market, issuing rated paper.

“Our return to the market has been positive for the company. We are very happy with the terms that have been available in the cat business we have written. It has been better than we envisaged when we agreed to our catastrophe strategy in Q3 2018,” Malloy reports.

Looking at the bigger picture Malloy points out that it has been a tough market for re/insurers on the investments side of the business, with depressed rates making it difficult for bond investments to generate sufficient returns to support the business.

“We take less underwriting risk than some of our competitors, but we make up for it by having a great investment strategy,” he says.

“Investors have been keeping their powder dry in the fixed income market for the last 10 years by staying with short duration and high quality, waiting for interest rates to pick up,” he adds.

“To make money you need either to invest at the long end, out to around 15 years, and take duration risk, or to invest in corporate bonds and take credit risk. You can’t any more count on your investment account to supplement your underwriting results.

Malloy points to how Berkshire Hathaway makes significant returns by investing its “float” using an array of investment strategies including purchasing entire companies.

“There is volatility in equity returns, and we have reduced our equity exposure this year from $1.4 billion to $850 million to allow us to take more underwriting risk,” he says.

“The Third Point fund has generated returns of around 22 percent year to date, so we remain convinced that it will continue to be a major contributor to results.”

Tech advances

Malloy adds that the market is becoming increasingly differentiated, partly due to improvements in technology such as artificial intelligence and the ability to make sense of increasing quantities of data.

Driving the reinsurer’s strategy in this field is Govrin, president of Third Point Re. He says that innovations in technology have the potential to make a big difference to re/insurers in a number of ways, but Third Point Re is most interested in developments that can help it underwrite business more efficiently and with greater accuracy.

He explains that, in his view, insurtech companies can be broken down into three types based on which part of a re/insurer they assist: distribution, operations and underwriting.

“On distribution they are focused on selling insurance more efficiently and at lower cost,” says Govrin.

“The operational-focused companies are trying to make the cost of operating an insurance business more efficient, and in underwriting it’s about how to automate the underwriting process and create a product that is priced more efficiently and with greater accuracy.

“As a reinsurance company we are obviously very focused on that third part, which is insurtech as related to product creation and underwriting.”

He says that Third Point Re is often asked to invest in insurtech companies, and it is most interested in those that have the potential to improve its underwriting.

“The opportunities we want to pay the most attention to are those where we’re being asked to provide capital support for insurtech operations that are focused on using technology to better underwrite the product, including lowering the costs associated with operating and distribution and improving the ability to segment risks in new ways,” he says.

According to Govrin, the pros are that they are all focused on pricing and distributing products more efficiently. He points out that the insurance industry operates with an expense ratio that, on average, is about 40 percent, and a loss ratio that is, on average, 50 to 60 percent.

“As a result, if a company can create a product that cuts into the 40 percent of expenses and/or lowers the loss ratio by virtue of more segmented pricing, then it can pass more of the benefit on to the consumer and have stickier and less volatile products,” he explains.

“The cons of insurtech are that many companies will get it wrong before they get it right.

“As a reinsurance company we are cautious on insurtech because we see many opportunities where there’s more focus on the technology side than on the underwriting side,” he adds.

“We don’t want to invest in or reinsure businesses that are loss leaders on the underwriting side in exchange for significant premium growth in order to drive up valuations. Many of the businesses we see don’t have the right balance of underwriting and sales.

“We’re most interested in businesses where there’s a strong team on underwriting and product creation, as well as on the technology side—and there needs to be a technological differentiation in both,” he concludes.